As filed with the Securities and Exchange Commission on April 17, 2003.
Registration No. 333-101032
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM SB-2
Registration Statement
Under
The Securities Act of 1933
USA TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 7359 23-2679963
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
200 Plant Avenue
Wayne, Pennsylvania 19087
(Address of principal executive offices and zip code)
George R. Jensen, Jr.
Chief Executive Officer
USA Technologies, Inc.
200 Plant Avenue
Wayne, Pennsylvania 19087
(610) 989-0340
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas M. Lurio, Esquire
Lurio & Associates, P. C.
One Commerce Square
2005 Market Street, Suite 2340
Philadelphia, PA 19103-7015
(215) 665-9300
-----------------------------------
Approximate date of proposed sale to the public: From time to time after
this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box:
[ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
======================================================================
CALCULATION OF REGISTRATION FEE
----------------------------------------------------------------------
Title of each
class of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered Per Unit(23) Offering Price Fee
---------- ------------ --------------- ------------- ------------
Common Stock,
no par value
2,475,318 shares(1) $.165 $ 408,427 $ 37.57
22,762,341 shares(2) $ .40 $9,104,936 $ 837.65
234,600 shares(3) $ .25 $ 58,650 $ 5.40
125,000 shares(4) $ .20 $ 25,000 $ 2.30
6,000,000 shares(5) $ .16 $ 960,000 $ 88.32
22,857,145 shares(6) $ .16 $3,657,143 $ 336.45
4,500,000 shares(7) $ .16 $ 720,000 $ 66.24
9,000,000 shares (8) $ .17 $1,530,000 $ 140.76
11,631,253 shares (9) $ .40 $4,652,501 $ 428.03
29,988,062 shares (10) $ .20 $5,997,612 $ 551.78
20,720,051 shares (11) $ .16 $3,472,922 $ 319.51
1,058,648 shares (12) $ .16 $ 169,383 $ 15.58
1,187,267 shares (13) $ .16 $ 189,962 $ 17.48
7,395,440 shares (14) $ .69 $ 5,102,854 $ 1,275.71
4,069,184 shares (15) $ .69 $ 2,807,736 $ 701.93
1,102,655 shares (16) $.17 $ 187,451 $ 17.24
139,000 shares (17) $4.00 $ 556,000 $ 161.94
2,340,450 shares (18) $2.88 $ 6,740,496 $ 1,685.12
5,751,080 shares (19) $ .69 $ 3,968,245 $ 992.06
467,692 shares (20) $ .69 $ 322,707 $ 80.67
11,631,253 shares (21) $ .17 $ 1,977,313 $ 181.91
1,480,000 shares (22) $ .16 $ 236,800 $ 21.78
Total 166,916,439 shares $52,846,138 $ 7,965.43 (24)
=========== ==========
(1) Represents shares underlying stock options granted to holders of options to
purchase shares of Stitch Networks corporation. The filing fee reflected
was paid in connection with the filing of this registration statement on
November 6, 2002.
(2) Represents shares exchanged for shares of Stitch Networks Corporation. The
filing fee reflected was paid in connection with the filing of this
registration statement on November 6, 2002.
(3) Represents shares issued to employees as severance compensation. The filing
fee reflected was paid in connection with the filing of this registration
statement on November 6, 2002.
(4) Represents shares issued to Karl Mynyk in settlement of litigation. The
filing fee reflected was paid in connection with the filing of this
registration statement on November 6, 2002. The filing fee reflected was
paid in connection with the filing of this registration statement on
November 6, 2002.
(5) Represents shares and shares underlying warrants issued to Yomi Rodrig. The
filing fee reflected was paid in connection with the filing of this
registration statement on November 6, 2002.
(6) Represents shares and shares underlying warrants issued to Kazi Management
VI, Inc. The filing fee reflected was paid in connection with the filing of
this registration statement on November 6, 2002.
(7) Represents shares and shares underlying warrants issued to Alpha Capital.
The filing fee reflected was paid in connection with the filing of this
registration statement on November 6, 2002.
(8) Represents shares to be issued to La Jolla Cove Capital under warrant. A
filing fee of $140.76 is being paid in connection with the filing of this
Amendment No. 1.
(9) Represents shares underlying senior notes due December 31, 2004. The filing
fee reflected was paid in connection with the filing of this registration
statement on November 6, 2002.
(10) Represents shares underlying senior notes due December 31, 2005 and shares
issued to each noteholder as part of the senior note offering. The filing
fee reflected was paid in connection with the filing of this registration
statement on November 6, 2002.
(11) Represents shares underlying warrants issued to holders of all senior
notes. The filing fee reflected was paid in connection with the filing of
this registration statement on November 6, 2002.
(12) Represents shares and shares underlying warrants issued to holders of
senior notes in lieu of cash interest payment for quarter ended September
30, 2002. A filing fee of $14.86 was paid in connection with the filing of
this registration statement on November 6, 2002, and the balance of $.72 is
being paid in connection with the filing of this Amendment No. 1;
(13) Represents shares and shares underlying warrants issuable to holders of
senior notes in lieu of cash interest payment for quarter ended December
31, 2002. A filing fee of $17.48 was paid in connection with the filing of
this registration statement on November 6, 2002.
(14)This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-72302, and pursuant to Rule 429 of the Securities Act of
1933, as amended, carries forward 7,395,440 shares of 2001-B restricted common
stock. A filing fee of $1,275.71 was paid in connection with the filing of the
previous registration statement.
(15) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-72302, and pursuant to Rule 429 of the Securities Act of
1933, as amended, carries forward 4,069,184 shares of 2001-C restricted common
stock. A filing fee of $701.93 was paid in connection with the filing of the
previous registration statement.
(16) Represents shares and shares underlying warrants issuable to holders of
senior notes in lieu of cash interest payment for quarter ended March 31, 2003.
A filing fee of $17.24 is being paid in connection with the filing of this
Amendment No. 1.
(17) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-72302, and pursuant to Rule 429 of the Securities Act of
1933, as amended, carries forward 139,000 shares of common stock underlying the
1998-B warrants. A filing fee of $161.94 was paid in connection with the filing
of the previous registration statement.
(18)This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-72302, and pursuant to Rule 429 of the Securities Act of
1933, as amended, carries forward 2,340,450 shares of common stock underlying
1999-B warrants. A filing fee of $1,685.12 was paid in connection with the
filing of the previous registration statement.
(19) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-72302, and pursuant to Rule 429 of the Securities Act of
1933, as amended, carries forward 5,751,080 shares of common stock underlying
2001-B warrants. A filing fee of $992.06 was paid in connection with the
filing of the previous registration statement.
(20) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-72302, and pursuant to Rule 429 of the Securities Act of
1933, as amended, carries forward 467,692 shares of common stock underlying
2001-C warrants. A filing fee of $80.67 was paid in connection with the filing
of the previous registration statement.
(21) Represents shares underlying senior notes due December 31, 2004. Because
these shares represent reduction of conversion price of 2004 Senior Notes, a
filing fee of $181.91 is being paid in connection with the filing of this
Amendment No. 1.
(22) Represents shares issued to employees and consultants in November 2002 for
services to be rendered in the future. The filing fee reflected was paid in
connection with the filing of this registration statement on November 6, 2002.
(23)Pursuant to Rule 457(c), the registration fee has been calculated at the
average of the bid and asked price within 5 days prior to the date of the filing
of the applicable registration statement.
(24)A filing fee of $7,624.80 was paid in connection with the filing of the
previous registration statements. The balance of $340.63 has been paid in
connection with the filing of this Amentment No. 1 to registration statement.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission ("SEC") is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
USA TECHNOLOGIES, INC.
166,916,439 shares of Common Stock
THE OFFERING
The resale of up to 166,916,439 shares of common stock in the over-the-
counter market at the prevailing market price or in negotiated transactions. We
will receive no proceeds from the sale of the shares by the selling
shareholders. However, we will receive proceeds from the sale of shares issuable
upon the exercise of warrants or options by the selling shareholders. Because
the selling shareholders will offer and sell the shares at various times, we
have not included in this prospectus information about the price to the public
of the shares or the proceeds to the selling shareholders.
Our common stock is included for quotation on the over-the-counter bulletin
board under the symbol "USTT." The closing bid price for the common stock on
April 3, 2003 was $.17 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. Please refer to Risk Factors beginning on
Page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is April 17, 2003.
TABLE OF CONTENTS
Prospectus Summary . . . . . . . . . . . . . . 9
Risk Factors . . . . . . . . . . . . . . . . . 14
Use of Proceeds . . . . . . . . . . . . . . . . .20
Managements Discussion And Analysis of
Financial Condition And Results
of Operations . . . . . . . . . . . . . . . . 21
Business . . . . . . . . . . . . . . . . . . . .30
Management . . . . . . . . . . . . . . . . . . .41
Principal Shareholders . . . . . . . . . . . . . 49
Certain Transactions . . . . . . . . . . . . . 52
Selling Shareholders . . . . . . . . . . . . . 53
Market for Common Stock . . . . . . . . . . . . 140
Description of Securities . . . . . . . . . . . 144
Plan of Distribution . . . . . . . . . . . . . 151
Legal Matters . . . . . . . . . .. . . . . . . 152
Experts . . . . . . . . . . . . . . . . . . . 152
Financial Statements . . . . . . . . . .. . . .F-1
PROSPECTUS SUMMARY
OUR COMPANY
USA Technologies, Inc., a Pennsylvania corporation (the "Company") was
founded in January 1992. Currently, the Company`s core business is its cashless
payment and control network. The equipment component of the network is e-Port ,
or, TransAct , and any associated equipment such as copiers, computers or
vending machines. When sold to hotels, the TransAct plus office equipment is
called the Business ExpressR. The e-Port or TransAct allows a consumer to use a
credit card to make a purchase from host equipment such as copiers, computers or
vending machines and gathers information about sales and operations of the host
equipment. The e-Port currently targets the vending industry. USA Technologies
has historically generated some revenues from the direct sale of this equipment.
A second source of revenues is generated from product sales from our Kodak
vending machines. Transaction processing revenue is recognized upon the usage of
the Company`s cashless payment and control network. Service fees for access to
the Company`s equipment and network are recognized on a monthly basis.
OUR BUSINESS
Equipment Sales
The e-Port or TransAct allows a consumer to use a credit card to make a
purchase from host equipment such as copiers, computers or vending machines and
gathers information about sales and operations of the host equipment. There are
capabilities for multiple forms of cashless payment processing, control and data
management, and auditing capability for vending operators, kiosk operators and
others wishing to place equipment or products on a network.
9
The e-Port is currently being utilized primarily in the vending industry.
The TransAct is currently being utilized in the hospitality industry (business
centers). Through the sale and installation of our Business Express (or Business
Express Limited Service) and MBE Business Express systems at nearly 400 hotel,
library and retail locations nationwide, Business Express and MBE Business
Express offer business travelers and consumers the opportunity to conduct
e-business/e-commerce 24 hours a day with the swipe of a credit card. The
Business Express systems give consumers self-serve, public access to the
Internet, copy and fax services, and other e-Business services. The TransAct
functions similar to the e-Port.
At December 31, 2002 USA had a total of 1,728 TransActs and e-Ports installed at
various hotels, vending machines, and amusement theme parks located throughout
the United States and Canada.
Product Sales
Our wholly-owned subsidiary, Stitch Networks Corporation, a Delaware corporation
("Stitch"), formed a strategic alliance with Eastman Kodak Company, Maytag
Corporation and Dixie Narco, Inc., to market and execute a national vending
program for the sale of one-time use camera and film products. Through this
alliance, we receive product revenues on the sale of each camera. Prior to the
acquisition of Stitch in May 2002, we did not have a revenue stream from product
sales.
10
Services and Transaction Fees
Service and transaction fees are generated by providing auditing and financial
services. The auditing feature captures supply chain data (units sold, what
sold, price of units sold) and other machine information, and sends the
information back to either a customer`s network or to our network for reporting.
The financial feature allows us to i) act as a merchant for our customers
thereby helping them to avoid getting certified by credit card processors to do
unattended transactions; and ii) provide refunds, payments, and reporting of the
credit card transactions. We receive a fee for each transaction performed and
receive a monthly service fee for access to the Company`s equipment and
network services.
Intellectual Property
We have been issued 19 patents related to our technology, including 1 patent
issued to Stitch. We have received notice of allowance for twenty-two patents.
In addition, thirty-nine are pending. We retain all rights to software and
proprietary technology that we license to location operators.
Research and Development Costs
For the years ended June 30, 2002 and 2001, and for the six months ended
December 31, 2002, we have expensed approximately $1,187,000, $1,260,000, and
$882,000, respectively for the development of our proprietary technology. These
amounts include the expense of outside consultants and contractors as well as
compensation paid to certain of our employees and is reflected in compensation
and general and administrative expense in the accompanying consolidated
financial statements. Through March 31, 2002, we capitalized approximately
$5.3 million for the services of IBM, to program the enhancements to our
proprietary "USAlive" server network and to the e-Port client. During the fourth
quarter of fiscal 2002, the e-Port product and related network became available
for general release to our customers. Management performed an evaluation of the
commercial success and preliminary market acceptance of the e-Port product and
network and accordingly, during the fourth quarter, we recorded an impairment
charge of approximately $2.7 million to reflect the software development costs
at their net realizable value of approximately $2.3 million.
11
ABOUT OUR OFFERING
Our selling shareholders are as of the date of this prospectus as follows:
* holders of 71,059,559 shares
* holders of unexercised options and warrants which if exercised would
represent 52,476,793 shares
* holders of senior notes which if converted would represent 43,380,087
shares
Based upon the shares outstanding as of December 31, 2002 of 99,096,167, if
all of these warrants and options are exercised, and all of these senior notes
are converted, we would have 195,658,549 shares outstanding (includes 705,502
shares held by selling shareholders issued after December 31, 2002).
These shares would be offered by our selling shareholders at the market
price at the time of resale. Our selling shareholders may also sell their shares
to other investors in a transaction not on the open market. There is no
requirement that our selling shareholders sell their shares pursuant to this
prospectus.
We will not receive any of the proceeds raised by the offering. We would
receive proceeds from the exercise by the selling shareholders of the warrants
or options referred to above.
12
RISK FACTORS
An investment in our common stock is very risky. You should be aware that
you could lose the entire amount of your investment. Prior to making an
investment decision, you should carefully consider the following risk factors
and the other information contained in this prospectus.
1. We have a history of losses since inception and if we continue to
incur losses the price of our shares can be expected to fall.
We have experienced losses since inception. We expect to continue to incur
losses for the foreseeable future as we expend substantial resources on sales,
marketing, and research and development of our products. From our inception
through December 31, 2002, our cumulative losses are $60.5 million. For our
fiscal years ended June 30, 2001 and 2002, and for the six months ended December
31, 2002, we have incurred net losses of $10,956,244, $17,314,807, and
$7,205,215, respectively. If we continue to incur losses, the price of our
common stock can be expected to fall.
13
2. Our existence is dependent on our ability to raise capital which may
not be available.
There is currently limited experience upon which to assume that our
business will prove financially profitable or generate more than nominal
revenues. From inception, we have generated funds primarily through the sale of
securities. There can be no assurances that we will be able to continue to sell
additional securities. We expect to raise funds in the future through sales of
our debt or equity securities until such time, if ever, as we are able to
operate profitably. There can be no assurance given that we will be able to
obtain funds in such manner or on terms that are beneficial to us. We are
currently using funds in our operations on a monthly basis of approximately
$700,000 and would require funds from the sales of securities of approximately
$8,400,000 to fund our operations for the next twelve months. Our inability to
obtain needed funding can be expected to have a material adverse effect on our
operations and our ability to achieve profitability. If we fail to generate
increased revenues or fail to sell additional securities you may lose all or a
substantial portion of your investment.
3. We received an opinion from our auditor which raises substantial
doubt about our ability to continue as a going concern.
Our auditors, Ernst and Young, LLP, have included an explanatory paragraph
in their report on our June 30, 2002 consolidated financial statements
indicating that as of June 30, 2002, there is substantial doubt about our
ability to continue as a going concern. We will require additional funds in the
future, and there can be no assurance that any independent auditors` report on
our future financial statements will not include a similar explanatory paragraph
if we are unable to raise sufficient funds or generate sufficient cash from
operations to cover the cost of our operations. The existence of the explanatory
paragraph may adversely affect our relationship with prospective customers,
suppliers and potential investors, and therefore could have a material adverse
effect on our business, financial condition and results of operations.
14
4. We depend on our key personnel and if they would leave us, our
business could be adversely affected.
We are dependent on key management personnel, particularly the Chairman and
Chief Executive Officer, George R. Jensen, Jr. The loss of services of Mr.
Jensen or other executive officers would dramatically affect our business
prospects. Certain of our employees are particularly valuable to us because:
o they have specialized knowledge about our company and operations;
o they have specialized skills that are important to our operations;
or
o they would be particularly difficult to replace.
We have entered into an employment agreement with Mr. Jensen that expires
in June 30, 2004. We have also entered into employment agreements with other
executive officers, each of which contain non-compete agreements. We have
obtained a key man life insurance policy in the amount of $2,000,000 on Mr.
Jensen, and a key man life insurance policy in the amount of $1,000,000 on our
Vice-President-Research and Development, Haven Brock Kolls, Jr.
We do not have and do not intend to obtain key man life insurance coverage
on any of our other executive officers. As a result, we are exposed to the costs
associated with the death of these key employees.
5. USA`s dependence on proprietary technology and limited ability to
protect our intellectual property may adversely affect our ability to
compete.
A successful challenge to our ownership of our technology could materially
damage our business prospects. Our technology may infringe upon the proprietary
rights of others. Our success is dependent in part on our ability to obtain
patent protection for our proprietary products, maintain trade secret protection
and operate without infringing the proprietary rights of others.
To date, we have pending patent applications, and intend to file
applications for additional patents covering our future products, although there
can be no assurance that we will do so. In addition, there can be no assurance
that we will maintain or prosecute these applications. The United States
15
Government granted us seventeen patents as of April 12, 2003. See "Business -
Patents, Trademarks and Proprietary Information." There can be no assurance
that:
o any of the remaining patent applications will be granted to us;
o we will develop additional products that are patentable or do not
infringe the patents of others;
o any patents issued to us will provide us with any competitive
advantages or adequate protection for our products;
o any patents issued to us will not be challenged, invalidated or
circumvented by others; or
o any of our products would not infringe the patents of others.
If any of the products are found to have infringed any patent, there can be
no assurance that we will be able to obtain licenses to continue to manufacture
and license such product or that we will not have to pay damages as a result of
such infringement. Even if a patent application is granted for any of our
products, there can be no assurance that the patented technology will be a
commercial success or result in any profits to us.
6. Competition from others with greater resources could prevent USA from
increasing revenue and achieving profitability.
Competition from other companies which are well established and have
substantially greater resources may reduce our profitability. Many of our
competitors have established reputations for success in the development, sale
and service of high quality products. We face competition from the following
groups:
o companies offering automated, credit card activated control systems in
connection with facsimile machines, personal computers, debit card
purchase/revalue stations, and use of the Internet and e-mail which
directly compete with our products. See "Business-Competition";
o companies which have developed unattended, credit card activated
control systems currently used in connection with public telephones,
prepaid telephone cards, gasoline dispensing machines, or vending
machines and are capable of developing control systems in direct
competition with USA; and
o businesses which provide access to the Internet and personal computers
to hotel guests. Although these services are not credit card
activated, such services would compete with USA`s Business Express(R).
Competition may result in lower profit margins on our products or may
reduce potential profits or result in a loss of some or all of our customer
base. To the extent that our competitors are able to offer more attractive
technology, our ability to compete could be adversely affected.
7. The termination of any of our relationships with third parties upon
whom we rely for supplies and services that are critical to our
products could adversely affect our business and delay achievement
of our business plan.
We depend on arrangements with third parties for a variety of component
parts used in our products. We have contracted with RadiSys Corporation and
Masterwork Electronics to assist us to develop and manufacture our
e-Port(TM) products. For other components, we do not have supply contracts with
any of our third-party suppliers and we purchase components as needed from time
to time. See "Business-Procurement". We have contracted with IBM to develop our
network services so that these services are Internet capable as well as interact
with our proposed media capable e-Post(TM). We have contracted with IBM to host
our network in a secure, 24/7 environment to ensure reliability of our network
services. If these business relationships are terminated, the implementation of
our business plan may be delayed until an
16
alternative supplier or service provider can be retained. If we are unable to
find another source or one that is comparable, the content and quality of our
products could suffer and our business, operating results and financial
condition could be harmed.
8. We do not expect to pay cash dividends in the foreseeable future
and therefore investors should not anticipate cash dividends on their
investment.
The holders of our common stock and series A preferred stock are entitled
to receive dividends when, and if, declared by our board of directors. Our board
of directors does not intend to pay cash dividends in the foreseeable future,
but instead intends to retain any and all earnings to finance the growth of the
business. To date, we have not paid any cash dividends on the common stock or
series A preferred stock. Although we issued a special stock dividend in August
1995 consisting of one-third of a share of common stock for each share of
outstanding series A preferred stock, there can be no assurance that cash
dividends will ever be paid on the common stock.
In addition, our articles of incorporation prohibit the declaration of any
dividends on the common stock unless and until all unpaid and accumulated
dividends on the series A preferred stock have been declared and paid. Through
December 31, 2002, the unpaid and cumulative dividends on the series A
preferred stock equal $5,570,963. The unpaid and cumulative dividends on the
series A preferred stock are convertible into shares of common stock at the rate
of $10.00 per share. Through December 31, 2002, $2,621,924 of unpaid and
cumulative dividends on the Series A preferred stock were converted into 282,369
shares of common stock. See "Description of Securities-Series A Convertible
Preferred Stock."
9. We may fail to gain widespread market acceptance of our products
and not generate sufficient revenues or profit margins to become successful.
On December 31, 2002, we have an installed base of only 1,728 TransActs and
e-Ports at commercial locations and revenues have been limited . There can be no
assurance that demand for our products will be sufficient to enable us to become
profitable. Likewise, no assurance can be given that we will be able to install
the TransActs and e-Ports at enough locations or sell equipment utilizing our
network to enough locations to achieve significant revenues or that our
operations can be conducted profitably. Alternatively, the locations which would
utilize the network may not be successful locations and our revenues would be
adversely affected. We may in the future lose locations utilizing our products
to competitors, or may not be able to install our products at competitor`s
locations. In addition, there can be no assurance that our products could evolve
or be improved to meet the future needs of the market place.
17
10. The lack of an established trading market may make it
difficult to transfer our stock and you may not be able to sell your shares on
our trading market.
Our common stock is traded on the OTC Bulletin Board. Although there is
limited trading in the common stock, there is no established trading market.
Until there is an established trading market, holders of the common stock may
find it difficult to dispose of, or to obtain accurate quotations for the price
of the common stock. See "Description of Securities - Shares Eligible For Future
Sale" and "Market For Common Stock."
11. There are rules governing low-priced stocks that may make it
more difficult for you to resell your shares.
Our common stock is currently considered a "penny stock" under federal
securities laws since its market price is below $5.00 per share. Penny stock
rules generally impose additional sales practice and disclosure requirements on
broker-dealers who sell our shares to certain investors.
Broker-dealers who sell penny stock to certain types of investors are
required to comply with the SEC`s regulations concerning the transfer of penny
stock. If an exemption is not available, these regulations require
broker-dealers to:
- make a suitability determination prior to selling penny stock to the
purchaser;
- receive the purchaser`s written consent to the transaction; and
- provide certain written disclosures to the purchaser.
- These rules may
affect the ability of broker-dealers to make a market in or trade our
shares. This, in turn, may affect your ability to resell those shares
in the public market.
12. The substantial market overhang of our shares and registered
resales under this prospectus will tend to depress the market price of our
shares.
The substantial number of our shares currently eligible for sale in the
open market will tend to depress the market price of our shares. See
"Description of Securities--Shares Eligible for Future Sale" and "Market for
Securities". As of December 31, 2002, these shares consisted of the following:
18
- 99,096,167 shares of common stock
- 529,132 shares of preferred stock
- 47,537,330 shares underlying options and warrants; and
- 35,943,203 shares underlying our convertible senior notes
13. Sales of shares eligible for future sale from exercise of warrants and
options could depress the market price of our common stock.
We presently have issued and outstanding options to purchase 3,317,485
shares of our common stock and warrants to purchase 44,219,845 shares. The
shares underlying all of these options and warrants have been registered and may
be freely sold upon issuance. Market sales of large amounts of our common stock,
or the potential for those sales even if they do not actually occur, may have
the effect of depressing the market price of our common stock. In addition, if
our future financing needs require us to issue additional shares of common stock
or securities convertible into common stock, the supply of common stock
available for resale could be increased which could stimulate trading activity
and cause the market price of our common stock to drop, even if our business is
doing well.
19
14. We are obligated to make substantial principal and interest payments
to the holders of the senior notes which may not be available or
would use our available working capital.
As of Dectember 31, 2002 we had $5,034,000 of unsecured senior notes due on
December 31, 2003, approximately $4,642,000 of unsecured senior notes due on
December 31, 2004, and approximately $4,062,000 of unsecured notes due on
December 31, 2005. These notes accrue cash interest at the rate of twelve
percent (12%) per year. As of December 31, 2002, we are required to make
quarterly interest payments totaling approximately $412,000, or $1,648,000 each
year.
In an effort to reduce the debt payments, we authorized the voluntary
conversion of the senior notes due December 2003 into shares of common stock at
the rate of $1.25 per share, at any time until maturity, the senior notes due
December 2004 into shares of common stock at the rate of $.40 per share through
maturity, and the senior notes due December 31, 2005 into shares of common stock
at the rate of $.20 per share. In March 2003, our Board of Directors granted to
the holders of the 2003 Senior Notes the right to extend the maturity date of
their note until December 31, 2006 in exchange for reducing the conversion rate
to $.20 per share and to the holders of the 2004 notes the right to extend the
maturity date of their note until December 31, 2007 in exchange for reducing the
conversion rate to $.20 per share. If all of the senior notes that are
outstanding at December 31, 2002 are converted, we will issue 35,943,203 shares
of common stock. We have agreed to use our best efforts to register for resale
under the Act the shares of common stock into which the senior notes are
convertible.
In the event that no additional senior notes are converted, on December 31,
2004, we are obligated to repay $5,034,000 of the senior notes on December 31,
2003, $4,642,00 of the date senior notes due December 31, 2004, and $4,062,000
of the senior notes on December 31, 2005. Until the senior notes have been paid
by us, they will be reflected as a liability on our financial statements, net of
the related unamortized discount and other issuance costs.
Our ability to satisfy the debt obligations is dependent on our future
performance, the success of our product lines and on our ability to raise
capital. Our performance is also subject to financial, business and market
factors affecting our business and operations.
We anticipate that the senior notes will be paid from cash from operations,
as well as proceeds from securities offerings. However, there can be no
assurance that we will meet our obligations to pay quarterly interest on or the
principal amount of the senior notes at maturity. The payment of the interest
and principal on these notes would utilize our available working capital which
would not be available for other purposes.
USE OF PROCEEDS
We will not receive any of the proceeds from the sales of our common stock
by the selling shareholders. The list of the selling shareholders entitled to
receive the net proceeds from any sales of our common stock begins on page 53
of this prospectus. We will, however, receive proceeds from the exercise of any
options or warrants by the selling shareholders.
As of the date of this prospectus, we would receive $3,341,932 of proceeds
from the exercise of all these options and warrants at the stated exercise
price. If our stock price would be $.17, the exercise of in the money warrants
and options would result in $2,987,075 of proceeds. If our stock price would be
$.20 the in the money options and warrants exercised would result in $3,321,932
of proceeds.
20
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and the accompanying notes. Actual results could differ
from those estimates. We believe the following accounting policies include the
estimates that are the most critical and could have the most potential impact on
our results of operations.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company`s
cashless payment and control services and network. Service fees for access to
the Company`s equipment and network are recognized on a monthly basis. Product
revenues are recognized from the sale of products from the Company`s vending
machines upon purchase and acceptance by the vending customer.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs after technological
feasibility of the software is established and through the product`s
availability for general release to the Company`s customers. All costs incurred
in the research and development of new software and costs incurred prior to the
establishment of technological feasibility are expensed as incurred. During May
2000, the Company reached technological feasibility for the development of the
e-Port control system and related network and, accordingly, the Company
commenced capitalization of software development costs related to this product.
Costs capitalized were approximately $2,239,000 and $2,938,000 during the years
ended June 30, 2002 and 2001, respectively. Amortization of software development
costs commence when the product becomes available for general release to
customers. Amortization of software development costs will be calculated as the
greater of the amount computed using (i) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross revenues
of that product or (ii) the straight-line method over the remaining estimated
economic life of the product. Amortization of such costs commences when the
product becomes available for general release to it customers. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.
During the fourth quarter of fiscal 2002, the e-Port product and related network
became available for general release to the Company`s customers. Management
performed an evaluation of the commercial success and preliminary market
acceptance of the e-Port product and network during the fourth quarter. As a
result the Company wrote down to its net realizable value $2,663,000 of software
development costs. The unamortized balanced is being amortized over an estimated
useful life of two years. Amortization expense during the year ended June 30,
2002, including the above impairment adjustment of $2,663,000, was $2,996,000.
Amortization expense during the six months ended December 31, 2002, was
$582,552.
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FORWARD LOOKING STATEMENTS
This Form SB-2 contains certain forward looking statements
regarding, among other things, the anticipated financial and operating results
of the Company. For this purpose, forward looking statements are any statements
contained herein that are not statements of historical fact and include, but are
not limited to, those preceded by or that include the words, "believes,"
"expects," "anticipates," or similar expressions. Those statements are subject
to known and unknown risks, uncertainties and other factors that could cause the
actual results to differ materially from those contemplated by the statements.
The forward looking information is based on various factors and was derived
using numerous assumptions. Important factors that could cause the Company`s
actual results to differ materially from those projected, include, for example
(i) the ability of the Company to generate sufficient sales to generate
operating profits, or to sell products at a profit, (ii) the ability of the
Company to raise funds in the future through sales of securities, (iii) whether
the Company is able to enter into binding agreements with third parties to
assist in product or network development, (iv) the ability of the Company to
commercialize its developmental products, or if actually commercialized, to
obtain commercial acceptance thereof, (v) the ability of the Company to compete
with its competitors to obtain market share, (vi) the ability of the Company to
obtain sufficient funds through operations or otherwise to repay its debt
obligations or to fund development and marketing of its products (vii) the
ability of the Company to obtain approval of its pending patent applications; or
(viii) the ability of the Company to satisfy its accounts payable and accrued
liabilities. Although the Company believes that the forward looking statements
contained herein are reasonable, it can give no assurance that the Company`s
expectations will be met.
INTRODUCTION
The Company had a net loss during the years ended June 30, 2002 and 2001,
and for the six months ended December 31, 2002 of $17,314,807, $10,956,244, and
$7,205,215, respectively, and anticipates incurring operating losses for the
remainder of fiscal 2003.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2002:
The six month period ended December 31, 2002 resulted in a net operating loss of
$7,205,215 compared to a net loss of $4,720,312 for the comparable period in the
prior fiscal year. Losses are projected to continue until sufficient revenue is
generated from equipment and product sales and service and transaction fees from
the Company`s proprietary technology.
Revenues for the six month period ended December 31, 2002 were $1,509,092, an
increase of $818,463 or 118% from the prior fiscal six month period ended
December 31, 2001. This increase in revenues is primarily due to the acquisition
of Stitch Networks Corporation, which accounted for approximately $665,000 of
the revenue increase. The remaining $153,000 increase was due to equipment sales
of e-Port and Business Express. The Company is continually increasing its sales
efforts to sell e-Ports as well as its Business Express products.
Overall, operating expenses for the six month period ended December 31, 2002
were $6,529,246, representing a $1,626,958 or 33% increase over the prior
period. The significant increases in each category were as follows:
The increase of $929,369 or 227% in cost of sales is due primarily to the
inclusion of amortization of software development costs ($582,550) and the cost
of product relating to sales of Stitch Networks Corporation. The remaining
increase in cost of sales is attributable to the increase in e-Port sales.
The increase in general and administrative expenses was $411,104 or 16%. This
increase is due to changes in the following expenses: product development
increase of $748,000 for work on the network; telephone expense increase of
$195,000 primarily due to Stitch Network operations; legal expense increase of
$132,000 for corporate activity required to grow and maintain our business;
insurance increase of $64,000 primarily for director and officer coverage;
professional fee increase of $35,000, primarily for auditing and accounting
fees; consulting, promotion and public relations decrease of $797,000 for
reduced corporate and investor relations services. We have continued to utilize
consultants for general business activities, including network services, and
have attempted whenever possible to pay for these services on a non cash basis
through the issuance of debt and equity instruments.
Compensation expense decreased $45,381 or 3% from the comparable six month
period last year. This decrease is due to a decrease in bonus expenses during
the six months ended December 31, 2002.
22
Depreciation and amortization expense of $494,663 increased by $331,661, which
is directly attributable to increased depreciation expense resulting from assets
acquired in the Stitch acquisition.
Interest expense increased by $509,607, due to the greater debt carried by the
Company to finance its operations. A significant portion of our interest expense
is non-cash debt discount.
FISCAL YEAR ENDED JUNE 30, 2002:
For the fiscal year ended June 30, 2002, the Company had a net loss of
$17,314,807. The loss applicable to common shares of $18,137,368 or $0.50 loss
per common share (basic and diluted) was derived by adding the $17,314,807 net
loss, the $822,561 of cumulative preferred dividends, and dividing by the
weighted average shares outstanding of 35,994,157.
Revenues for the fiscal year ended June 30, 2002 were $1,682,701, an increase of
$231,699 or 16% from the prior year. This increase in revenues is directly
attributable to the acquisition of Stitch Networks Corporation, which accounted
for $210,068 of the increase. Other revenues remained flat with the prior
year, as the Company`s sales efforts, focused mainly on the customer acceptance
of the e-Port and through June 30, 2002 and 2001, have not produced significant
revenues due to limited market acceptance which was less than that anticipated
by the Company. The Company is continually increasing its sales efforts to sell
e-Ports as well as its Business Express products.
Overall, operating expenses for the fiscal year ended June 30, 2002 were
$16,999,478, representing a $7,378,803 or 77% increase over the prior year.
This increase is due to the increases of $3,098,688 or 380% in cost of sales,
$2,361,637 or 42% in general and administrative expenses, $1,687,886 or 57% in
compensation expense, and $230,592 or 71% in depreciation and amortization
expense. The significant increases in each category are as follows:
The increase of $3,098,688 and 380% in cost of sales is due primarily to the
inclusion of amortization of software development costs and the cost of product
relating to Stitch Networks Corporation. In fiscal 2002, the Company recorded
software amortization of approximately $2.9 million, including an impairment
charge of approximately $2,663,000, in cost of sales as required by generally
accepted accounting principles. The remaining increase in cost of sales is
attributable to the increase in sales, primarily related to the Stitch revenues
in fiscal 2002.
23
The increase in general and administrative expenses of $2,361,637 or 42% is due
primarily to the increase in consultant fees of $1,125,724, promotion expense of
$1,574,252 and public relations expenses of $454,812. As noted above, these
increases in costs to date have gained only limited acceptance of the e-Port in
the marketplace, and accordingly, these expenditures have not yet resulted in
any significant increase in revenues for the Company. Due to the Company`s
small size, we have retained consultants to use in general business activities
in exchange for equity awards. The Company is continuing to pay for services
rendered through the issuance of debt and equity instruments in a concerted
effort to manage cash flows resulting in non cash charges. These increases were
offset by a substantial decrease in legal expenses of $992,181, primarily
associated with termination of the MBE litigation, which was settled in fiscal
year 2001.
The increase in compensation expense of $1,687,886 or 57% from the previous year
is mainly attributable to an increase in stock bonus expense to Company officers
and employees of $1,248,545, which was non-cash expense. The stock bonuses
were issued in order to adequately compensate and attempt to retain the
Company`s management team intact. Corporate salaries increased $342,921 or
113%, due to increased headcount by 16% during the year, primarily due to the
addition of Stitch Network`s personnel during the last one and one half months
of 2002.
Depreciation and amortization expense of $440,238 increased by $230,592, which
is directly attributable to increased depreciation expense resulting from assets
acquired in the Stitch acquisition.
Other income and expense increased by $895,459, primarily as a result of the
non-cash amortization to interest expense relating to the debt discount and
beneficial conversion features on the Company`s Senior Notes.
FISCAL YEAR ENDED JUNE 30, 2001:
For the fiscal year ended June 30, 2001, the Company had a net loss of
$10,956,244. The loss applicable to common shares of $11,792,785 or $.70 loss
per common share (basic and diluted) was derived by adding the $10,956,244 net
loss, the $836,541 of cumulative preferred dividends, and dividing by the
weighted average shares outstanding of 16,731,999.
Revenues for the fiscal year ended June 30, 2001 were $1,451,002, a
decrease of $603,339 or 29% from the prior year, primarily due to a decrease of
$745,000 or 55% in equipment and installation sales of our higher priced
Business Express and Business Express Limited Service Series (LSS). Offsetting
this decrease were increases in the sale of the Company`s standalone TransAct
control system of $129,000 or 462% and the initial sales of the non-media e-Port
control system of $19,000 or 100%.
Operating expenses for the fiscal year ended June 30, 2001 were
$9,620,675, representing a $746,333 or 8% increase over the prior year. The
primary contributors to these increases were compensation expense and general
and administrative expense offset by reductions in cost of sales, as detailed
below.
The exchange of the 1999 Senior Notes to the 2000 Senior Notes was
determined to be a substantial modification of the terms of the original debt
instrument and, accordingly, the Company wrote-off the unamortized debt discount
and other issuance costs associated with the exchange of the 1999 Senior Notes
in the amount of $863,000. Such amount has been reported as a (non-cash)
extraordinary item in the fiscal year 2001 statement of operations.
Cost of sales decreased by $442,555 from the prior year, primarily
reflecting the decrease in the Business Express and Business Express LSS
centers sold. General and administrative expenses of $5,628,014 increased by
$626,182 or 13%. This increase was due to increased product development costs of
$450,000, public relations expenses of $188,000, license expense for DoubleClick
Adserver software of $120,000, market research expenses of $88,000, trade show
and related travel expenses of $74,000, offset by a decrease in legal expenses
of $238,000, primarily associated with the MBE litigation which has been settled
in fiscal year 2001.
24
Compensation expense was $2,966,776, an increase of $463,611 or 19% from
the previous year. The increase was due to an increase in executive bonus
expense of $234,000 or 66%, of which $201,000 was non-cash. Additional increases
in salaries and related employee benefits of $169,000 or 9%, are due to
increased personnel activities in all areas of the Company and an increase of
$51,000 in the matching 401K Company contributions instituted in July 2000.
The exchange of the 1999 Senior Notes to the 2000 Senior Notes was
determined to be a substantial modification of the terms of the original debt
instrument and, accordingly, the Company wrote-off the unamortized debt discount
and other issuance costs associated with the exchange of the 1999 Senior Notes
in the amount of $863,000.
Depreciation expense of $209,646 increased by $99,095, which is
directly attributable to the increased depreciable asset base.
Other income and expense decreased by $481,909, primarily as a result
of the extension of the amortization period of the debt discount due to the
exchange of certain 1999 Senior Notes into 2000 Senior Notes, which is a
non-cash expense.
In November 2000, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) required companies to adopt a new
methodology for computing the beneficial conversion feature of convertible
securities, which is to be applied retroactively for commitments entered into on
or after May 20, 1999. Accordingly, a one-time, non-cash charge of $821,000 has
been recorded for the cumulative effect of accounting change as required under
the guidance provided by the EITF.
New Accounting Pronouncements
In June 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations", and No. 142, Goodwill and Other Intangible Assets.
Statement No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Statement No. 141 also
includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations completed after June
30, 2001. Statement No. 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives. Statement No. 142 requires that
these assets be reviewed for impairment at least annually. Intangible assets
with finite lives will continue to be amortized over their estimated useful
lives. As Statement No. 142 is effective for fiscal years beginning after
December 15, 2001, the Company will adopt the Statement on July 1, 2002.
Although the Company did not adopt Statement No. 142 until fiscal year 2003, the
nonamortization provisions of Statement No. 142 for combinations initiated after
June 30, 2001 are applicable for the Company effective July 1, 2001.
Under Statement No. 142 the Company will test goodwill for impairment during
fiscal year 2003 using the transitional two-step process prescribed in Statement
No. 142. The first step is a screen for potential impairment, while the second
step measures the amount of the impairment, if any. The Company expects to
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of July 1, 2002 in the second quarter of fiscal year
2003. If the first test indicates a potential impairment, the second phase will
be completed to calculate any actual impairment. Any impairment charge resulting
from these transitional impairment tests will be reflected as the cumulative
effect of a change in accounting principle in the first quarter of fiscal year
2003. The Company has completed the transitional test of goodwill as of July 1,
2002, as prescribed in Statement No. 142, during the quarter ended December 31,
2002 using a discounted cash flow analysis. The Company has concluded that there
were no goodwill impairment indicators to be recorded as a result of this
transitional test.
The FASB recently issued Statement No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets, that is applicable to financial statements issued
for fiscal years beginning after December 15, 2001. The FASB`s new rules on
asset impairment supersede FASB Statement 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and portions of
APB Opinion 30, Reporting the Results of Operations. This Standard provides a
single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in the period in
which the losses are incurred, rather than as of the measurement date as
presently required. The provisions of this Standard will be adopted by the
Company on July 1, 2002 and are not expected to have a significant effect on the
Company`s financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 requires gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations
-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 145 is effective for fiscal years beginning after May 15, 2002. Upon
adoption of SFAS No. 145, any gain or loss on extinguishment of debt previously
classified as an extraordinary item in prior periods that does not meet the
criteria of APB Opinion No. 30 for such classification should be reclassified to
conform with the provisions of SFAS No. 145. Accordingly, the $863,000
extraordinary loss on the 2001 exchange of debt (Note 10), has been reclassified
as a loss from continuing operations during fiscal year 2001 in the accompanying
consolidated financial statements.
PLAN OF OPERATIONS
At December 31, 2002 we had a total of 1,728 TransActs and e-Ports at
various hotels, vending machines and amusement theme parks located throughout
the United States and Canada.
During the six months ended December 31, 2002, revenues generated from
equipment sales of Business Express and related hospitality offerings were
approximately $340,000. These revenues were a result of USA`s sales of the
equipment with various hotel chains, directly and through distributors.
In May 2002, we acquired Stitch to increase product offerings and the
related revenues. These revenues would include product revenues based on
purchases of cameras and film and the related monthly service fees.
Additionally, certain Stitch personnel which the Company believed would enhance
its business were also acquired. Since we acquired Stitch, we have eliminated a
substantial number of former Stitch employees, are in the process of combining
technologies, consolidating facilities and reducing duplicative operating
expenses. We are also attempting to reduce our operating expenses incurred in
connection with the ongoing Stitch business operations.
During the six months ended December 31, 2002, the costs incurred in the
ongoing maintenance of our network were reduced by approximately $500,000. The
costs saved in eliminating the Stitch employees were approximately $500,000 per
year.
25
In March 2002, the Company signed an agreement with MEI (Mars Electronics),
a world leader in the manufacturing of electronic coin mechanisms and dollar
bill acceptors for the vending industry. MEI has agreed to sell and distribute
an MEI branded cashless payment system to be developed by the Company, as part
of its portfolio of vending solutions. Commercial availability is planned for
spring 2003 and through the date of this prospectus no revenues have been
generated from this arrangement.
Recently, the Company completed development of an e-Port application using
hotel room keys, and 40 vending machines are now operating with such technology
at the 1,400 room Gaylord Palms Resort Hotel in Orlando, Florida. Through the
date of the prospectus, approximately $14,000 of reveneues have been generated
through these equipment sales.
26
The Company`s Vending Machines for the Kodak Program are purchased from
Dixie Narco and the film and cameras are purchased directly from Eastman Kodak
Company. Product revenues through the six months ended December 31, 2002 were
approximately $279,000. In addition, during this period, service and transaction
fee revenues were approximately $325,000 related to this program.
In October 2002, the Company signed a Strategic Alliance Agreement
with ZiLOG Corporation, a semiconductor company which is a supplier of
microprocessors to the retail point of sale industry. The agreement allows the
Company`s proprietary network software (USAlive) to be embedded on a chip
produced by ZiLOG. The Company would license its software to the purchaser and
would receive a fee from the licensing of each such chip. A second revenue
stream could be generated when those who buy the retail point of sales terminals
begin to use them, because they could elect to use the USA network which is
embedded on the chip. As of the date of this prospectus, no products have been
available for commercial use and accordingly, no revenues have been generated.
In laundry, American Sales Inc. (ASI) signed a five year agreement to
purchase units of Stitch`s e-Suds laundry solution for their university
locations in the Midwest, with initial installations to begin in the summer of
2002. The agreement provides that if ASI purchases at least 9,000 units over the
contract period, then ASI shall have exclusive rights to the units in Ohio,
Kentucky, Indiana, Michigan and Marshall University. Through the date of this
prospectus ASI has not purchased any units.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended June 30, 2002, the Company completed
several financing transactions. Net proceeds of $3,912,765 were realized from
private placement offerings of Common Stock including the exercise of Common
Stock Purchase Warrants and Options, and net proceeds of $3,944,233 were
27
realized from private placement offerings of Senior Notes. As of June 30, 2002,
the Company had a working capital deficit of $4,607,486, which included cash and
cash equivalents of $557,970 and inventory of $877,814.
During the fiscal year ended June 30, 2002, net cash of $6,133,766 was
used by operating activities, primarily due to the net loss of $17,314,807
offset by a non-cash charge of $4,532,533 for Common Stock, options and warrants
issued for services; $3,032,479 of non cash amortization primarily to record an
impairment charge of $2,663,000 to reduce such software development costs to
fair value; and $1,513,118 of non-cash amortization of the debt discount
relating to the Senior Notes. During the fiscal year ended June 30, 2002, net
cash used in investing activities was $63,459 principally due to the increase in
software development costs of $2,238,771 relating to the e-Port and associated
network, offset by the cash acquired in the Stitch acquisition. The
net cash provided by financing activities of $5,937,625 was attributable
primarily to net proceeds generated from the issuance of Common Stock through
private placements, exercise of Common Stock Purchase Warrants, and net proceeds
generated through the issuance of 2001 and 2002 Senior Notes, as described
in the prior paragraph, offset by the paydown during June 2002 of
$2,165,000 of debt assumed in the Stitch acquisition.
In June 2002, the Company commenced a private placement offering (the
2002-A offering) of up to $4,000,000 of Convertible Senior Notes (later
increased to $4,300,000). The offering consists of up to 400 units at $10,000,
convertible into Common Shares at $.20 per share. Each noteholder initially was
to receive 20,000 Common Stock warrants for each unit purchased. However,
subsequent to June 30, 2002, the offering was amended to replace the warrants
with 20,000 shares of Common Stock for each unit. The offering is exempt from
the registration requirements of the Act pursuant to Section 4(2) and Rule 506
thereunder and is being offered and sold only to accredited investors. The
Company has agreed to prepare and file at its expense a registration statement
covering the resale of the shares of Common Stock. The offering terminated
October 31, 2002 with total subscriptions of $4.284 million received prior to
any shareholder conversion. Mr. Jensen and Mr. Herbert have each subscribed for
$100,000 into this offering, as compensation for services rendered and to be
rendered.
During August 2001, the Company issued to La Jolla Cove Investors a
$225,000 (increased by $100,000 on June 18, 2002) Convertible Debenture bearing
9 3/4 percent interest with a maturity date of August 2, 2003. Interest is
payable by the Company monthly in arrears. The Debenture is convertible at the
lower of $1.00 per share or 80% (later lowered to 72%) of the lowest closing bid
price of the Common Stock during the 20 days preceding exercise. La Jolla is
limited to no more than 5% of the investment that is convertible during any
month. If on the date of conversion the closing bid price of the shares is $.40
or below, the Company shall have the right to prepay the portion being converted
at 150% of the principal amount being converted. In such event, La Jolla shall
have the right to withdraw its conversion notice. At the time of conversion of
the Debenture, the Company has agreed to issue to La Jolla warrants to purchase
an amount of Common Stock equal to ten times the number of shares actually
issued upon conversion of the Debenture. The warrants are exercisable at any
time for two years following issuance and at the related conversion price of the
28
Debenture. The Company has filed at its expense a registration statement
covering the resale of the shares of Common Stock underlying the Debenture as
well as the related warrants issuable upon conversion of the Debenture. At June
30, 2002, there were $243,000 Convertible Debentures outstanding with a due date
extended (by Agreement on June 18, 2002) to August 2, 2004. Subsequent to June
30, 2002 and through December 31, 2002, La Jolla converted $51,000 of Debentures
into 495,422 shares of Common Stock and exercised Warrants at an average price
of approximately $.103 per share to purchase 4,954,210 shares of Common Stock.
Total proceeds for the warrants were $510,000, for which the Company received
cash proceeds of $350,000 and utilized a previously received deposit of
$160,000.
In connection with the Stitch acquisition (Note 3 to the Consolidated
Financial Statements), the Company assumed long term debt of $3,976,000 which
included a vending equipment borrowing facility and working capital loans. The
Company repaid $2,165,000 of the working capital loans in June 2002. All but
$225,000 of these working capital loans bear interest at a variable rate based
on the bank`s prime rate. These loans are secured by the assets of Stitch. At
June 30, 2002 $275,000 of working capital loans are outstanding of which
$225,000, bears interest at 6.75%, was payable on July 8, 2002 and $50,000
was payable on demand. Subsequent to June 30, 2002 and through February 21,
2003, the Company has made payments to the bank totaling $ 66,939. The
outstanding balance as of March 31, 2003 is $ 167,711. On July 26, 2002,
August 29, 2002 and September 27, 2002, October 31, 2002, February 3, 2003 and
February 19, 2003, the bank agreed to extend the due date of these notes until
September 1, 2002, October 1, 2002, November 1, 2002, December 1, 2002, March 1,
2003 and March 17, 2003, respectively. In connection with these extensions, the
Company paid $3,000 of fees to the bank. The Company is currently in default
under this loan and is in discussions with the bank to renogiate this debt.
Also as a result of the Stitch acquisition, the Company incurred
increased operating costs. For the six month period ended December 31, 2002,
this increase was approximately $900,000. As discussed above, we are attempting
to reduce these increased operating expenses.
At June 30, 2002 the Company also has a $1.5 million borrowing
facility available (the Facility) to fund the purchase of vending machines
placed at locations where Kodak film products are sold. Borrowings are made from
time to time under the facility, with repayment schedules set at the time of
each borrowing, including equal monthly payments over 36 months and an interest
rate based upon 495 basis points over the three year U.S. Treasury Notes. The
Company has granted the bank a security interest in the film products vending
machines. Repayment of principal is also insured by a Surety Bond issued by a
third-party insurer in exchange for an initial fee paid by the Company.
Subsequent to June 30, 2002, the Company has not borrowed any additional funds
under this facility.
29
A summary of outstanding debt obligations of the Company at December 31,
2002 is as follows:
December 31
2002
------------
(Unaudited)
Bank facility $ 1,044,900
Working capital loans 194,635
IBM inventory financing 2,047
Capital lease obligations 24,799
------------
1,266,381
Less current portion 789,373
------------
$ 477,008
============
During the remainder of fiscal 2003, the Company anticipates expensing
additional expenditures of approximately $0.5 million for enhancements to its
software development on its network.
The Company has incurred losses of $17.3 million, $11.0 million, and $7.2
million during each of the fiscal years ending June 30, 2002 and 2001, and for
the six months ended December 31, 2002, respectively, and cumulative losses from
inception through December 31, 2002 amounting to $60.5 million. At December 31,
2002 the Company`s working capital deficit is $7,979,127. A primary reason for
the increase in the deficit from June 30, 2002 is the inclusion in current
liabilities of the senior notes payable on December 31, 2003. The Company will
require additional debt or equity financing for its operations which may not be
readily available. These factors raise substantial doubt about the Company`s
ability to continue as a going concern. The Company`s independent auditors have
included an explanatory paragraph in their report on the Company`s June 30, 2002
consolidated financial statements. The Company believes that the funds available
at June 30, 2002 combined with events that have occurred to date and are
anticipated to occur including the anticipated revenues to be generated during
fiscal year 2003, the potential capital to be raised from the exercise of the
Common Stock Purchase Warrants, the funds anticipated to be received in current
and future private placements, and the ability to reduce anticipated
expenditures, will allow the Company to continue as a going concern. In this
regard, management estimates that the cash as of March 31, 2003 of approximately
$500,000 plus funds raised through sales of securities would fund our cash
requirements of $700,000 per month through at least June 30, 2003.
During the 2002 fiscal year the Company used cash of approximately $500,000 per
month in its operations. During the six months ended December 31, 2002 the
Company used cash of approximately $700,000 per month in its operations and
continues to use $700,000 per month of cash in operations per month subsequent
to December 31, 2002.
The Company`s current liabilities at December 31, 2002 of $11.7 million
principally consist of outstanding debt in the amount of approximately $800,000,
accounts payable of $4.1 million, accrued expenses of $2.2 million and
$5,034,000 of Senior Notes maturing in December 2003. Of this amount $3,352,000
of such current liabilities related to the Company`s wholly owned subsidiary,
Stitch Networks Corporation.
The Company is currently in default on a working capital loan acquired in
connection with the Stitch acquisition with a current outstanding balance of
$167,000. The Company is currently in discussions with the bank to renegotiate
the terms of this debt. The equipment line of credit acquired in the Stitch
acquisition has an outstanding balance of $1,043,000 at December 31, 2002. The
Company is current on its payment terms for this line of credit agreement.
At December 31, 2002 accounts payable was approximately $4.1 million of which
$2.5 million is outstanding greater than 90 days. The Company works with its
vendors on a continuous basis to reduce the outstanding payable balances. The
significant amount of our working capital deficit has had the effect of
increasing the immediacy of timing of our capital needs. In addition, the time
and attention given by management to satisfying our working capital deficit
detracts from management`s pursuit of development and sales of our products.
In March 2003 the Company`s Board of Directors granted to the holders of the
Senior Notes due in December 2003 the right to extend the maturity date to
December 31, 2006 in exchange for the conversion rate on these notes from $1.25
per share to $.20 per share. Management anticipates that substantially all of
the note holders will accept this change and, accordingly the Company does not
believe it will require any substantial amounts of cash to fund these
obligations at their maturity at December 31, 2002. As of April 7, 2003, $1.7
million of the 2003 notes have been extended to December 31, 2006 and $2.1
million of the 2004 notes have been extended to December 31, 2007.
30
We currently have very limited cash resources and liquidity, and must continue
to raise funds through sales of our securities in order to continue business
operations. For the 2003 calendar year, the Company anticipates that it would
require cash of $8.4 million for funding of business operations ($700,000 per
month) and $7.0 million to pay all of our accrued and unpaid liabilities as of
December 31, 2002 (consisting of $4.1 million of accounts payable, $2.2 million
of accrued expenses, and $.8 million of current obligations under long-term
debt) for a total funding requirement of $15.4 million.
After subtracting $2.0 million of certain current assets as of December 31, 2002
(consisting of cash, accounts receivable and inventory) and the $1.9 million
raised by us through March 31, 2003 from the sale of shares and exercise of our
noteholder warrants, we anticipate our additional cash needs for the 2003
calendar year to be $11.5 million.
Of this $11.5 million amount, we anticipate raising $3.3 million from the
existing in the money warrants and $2.2 million from the sales of our shares of
Jubilee acquired in February 2003. The balance of $6.0 million is anticipated to
be raised by us from the sales of additional securities during the calendar
year. To the extent that the shares of Jubilee do not result in the anticipated
proceeds, or to the extent that less warrants are exercised than anticipated, we
would have to sell additional securities. The funds required to be raised
through the sales of additional securities would be reduced by the cash, if any,
generated from our operations during the calendar year, and the continued
reductions, if any, in our operating costs associated with the Stitch business
operations. To the extent that we are unable to generate sufficient cash as
outlined above, we intend to pay our current operating expenses and will attempt
to continue to negotiate with our past due creditors.
31
COMMITMENTS
The Company leases its principal executive offices, consisting of
approximately 10,000 square feet, at 200 Plant Avenue, Wayne, Pennsylvania for a
monthly rental of $14,000 plus utilities and operating expenses. The lease
expired on June 30, 2002, and subsequently the Company has leased these
facilities on a month to month basis. With the acquisition of Stitch Networks,
the Company acquired 12,225 square feet of rented space in Kennett Square, PA.
The rent is $11,153 per month and the lease expires on March 2005. The Company
is consolidating facilities, and therefore has vacated the rented space in
Kennett Square. For that reason, the Company has accrued for the remaining
payments of the lease of approximately $354,000 as part of the Stitch purchase
price as of June 30, 2002 (see Note 3 to the Consolidated Financial Statements).
The Company is attempting to secure a tenant to sublease the space for the
duration of the lease and is in default under the lease since August, 2002.
Subsequent to June 30, 2002, the Company also signed a lease for 16.5 months for
$4,000 per month for additional space in Malvern, PA for business activities.
Other Events
During September 2002, the Company issued to an investor, Yomi Rodig,
2,000,000 shares of its restricted Common Stock at $.12 per share generating
gross proceeds of $240,000. This investor also received a warrant to purchase up
to 2,000,000 shares of restricted Common Stock of the Company at $.10 per share
at any time on or before November 30, 2002 (subsequently extended to April 30,
2003) and if all such warrants are exercised, the investor was granted another
warrant to purchase up to 2,000,000 shares of Common Stock at $.10 per share
expiring April 30, 2003. We have agreed to register for resale these shares as
well as the shares underlying the warrants for a period of one year from the
date of this prospectus.
Subsequent to June 30, 2002 and through October 31, 2002 the Company issued
$3.84 million of 2002-A Senior Notes. A total of $1,329,800 of these Senior
Notes are to certain officers, directors and consultants of the Company in
exchange for services to be performed and are therefore reflected as prepaid
professional fees at December 31, 2002.
During October 2002, the Company issued to an investor, Alpha Capital
Aktiengesellschaft, 1,500,000 shares of its restricted Common Stock at $.10 per
share generating net proceeds of $123,000. The investor also received a warrant
to purchase up to 750,000 shares of restricted Common Stock of the Company at an
exercise price of $0.15 per share exercisable at anytime for five years. On the
seventh business day after the date of this prospectus, the investor has agreed
to purchase an additional 1,500,000 shares of restricted Common Stock at $.10
per share and receive another warrant to purchase up to 750,000 shares of
restricted Common Stock at the then closing price exercisable for 5 years. We
have agreed to register for resale these shares and the shares underlying the
warrants until November 2005. The Company paid a finder`s fee of $15,000 to
Libra Finance, S.A. in connection with the investment.
During October 2002, the Company issued to an investor, Kazi Management VI,
Inc., 3,571,429 shares of its restricted Common Stock at $.07 per share
generating net proceeds of $244,925. This investor also received a warrant to
purchase up to 7,142,858 shares of restricted Common Stock of the Company at
$.07 per share at any time on or before October 26, 2007, and a warrant to
purchase up to 7,142,858 shares of Common Stock at $.07 per share and up to
5,000,000 shares at $.10 per share over a one year period. None of these
warrants have been exercised as of December 31, 2002. We have agreed to
register for resale these shares as well as the shares underlying the warrants
for a period of five years.
During October 2002 the Company`s Board of Directors also approved that for
the quarterly interest payment made by the Company on the 12% Convertible Senior
Notes (for September 30, 2002 and December 30, 2002), at the option of the note
holder, the interest payment due can be used to purchase shares of the Company`s
Common Stock at a rate of $.20 per share. For each share purchased, the note
holder shall receive a warrant to purchase one share of the Company`s Common
Stock at $.20 per share exercisable at any time prior to June 30, 2004. During
the three and six months ended December 31, 2002, 529,324 and 593,634 shares
respectively, were issued for payment of the quarterly interest payment and
529,324 and 593,634 warrants to purchase Common Stock were issued to the note
holders, respectively. The fair value of the warrants issued of approximately
$93,000 was determined using the Black Scholes Valuation Model.
During October 2002, the Company agreed to issue 1,480,000 shares of its
Common Stock to certain of its employees and consultants at $.16 per share. Such
shares were issued for services to be performed in subsequent periods. At
December 31, 2002, $236,800 is reflected in prepaid professional fees for the
services that have not been performed as of December 31, 2002.
During October 2002, the Company granted to all of the holders of the 12%
Convertible Senior Notes, 10,306,026 Common Stock warrants to purchase Common
Stock at $.10 per share. The total number of the warrants issued was that number
of shares equal to 75% of the dollar amount of the Senior notes held by the note
holders. The warrants are exercisable through November 30, 2002 (subsequently
extended through April 30, 2003). Upon the exercise of this warrant by the
Senior note holder, the Company granted an identical number of warrants to that
32
note holder with an exercise price of $0.10 per share exercisable through April
30, 2003. Through December 31, 2002, the note holders exercised a total of
5,080,261 Common Stock warrants of the originally granted warrants of the
10,306,026 warrants initially granted, generating gross proceeds to the Company
of $508,026. An additional 5,080,261 warrants were granted upon the exercise of
the initial warrant to these note holders at December 31, 2002. Of these
additional March 2003 warrants, 291,376 were exercised as of December 31, 2002,
generating gross proceeds to the Company of $29,138. Subsequent to December 31,
2002 and through February 12, 2003, 475,909 of the Common Stock warrants
expiring on January 31, 2003 and March 31, 2003, were exercised at $.10 per
share by the 12% Senior Note Holders generating gross proceeds of $47,591.
During August 2001, the Company issued to an investment company a 9.75%
$225,000 Convertible Debenture maturing August 2003. On June 18, 2002, the
Debenture was increased by $100,000, the maturity date extended to August 2004,
and the conversion rate was lowered. Interest is payable by the Company monthly
in arrears. The Debenture is convertible at the lower of $1.00 per share or 72%
of the lowest closing bid price of the Common Stock during the 20 days preceding
exercise. The investment company is limited to no more than 5% of the investment
that is convertible during any month, on a cumulative basis. If on the date of
conversion the closing bid price of the shares is $.40 or below, the Company
shall have the right to prepay the portion being converted at 150% of the
principal amount being converted. In such event, the investment company shall
have the right to withdraw its conversion notice. At the time of conversion of
the Debenture, the Company will issue to the investment company warrants to
purchase an amount of Common Stock equal to ten times the number of shares
actually issued upon conversion of the Debenture at the same conversion price as
the Debenture. The warrants are exercisable at any time for two years following
issuance and at the related conversion price of the Debenture. During the six
months ended December 31, 2002, the investment company converted $51,000, of the
Debenture resulting in the issuance of 495,421 shares of Common Stock, and
exercised related warrants for 2,941,950 shares, resulting in gross proceeds of
$510,000 during the six months ended December 31, 2002. The investment company
has paid the Company $120,000 towards a future exercise of Common Stock warrants
which has been reflected in deposits at December 31, 2002.
In February 2003, Jubilee Investment Trust, PLC ("Jubilee"), a United
Kingdom investment trust, made an equity investment in USA Technologies at U.S.
$0.20 per share. Jubilee is a newly established investment trust set up to
invest in securities traded on a range of public markets, primarily in the
United Kingdom. USA Technologies issued to Jubilee 15,000,000 shares of Common
Stock of USA Technologies at a price per share of U.S.$0.20 with an aggregate
value of U.S.$3,000,000. In full payment for the shares of USA Technologies,
Jubilee issued to USA Technologies a U.S.$3,000,000 equivalent of their shares
(1,870,091 shares of Jubilee at a price per share valued at One British Pound
which was the initial public offering price per share for the Jubilee shares).
The exchange rate used by the parties for the transaction was One British Pound
equals U.S.$1.6042. The Company intends to attempt to sell the Jubilee shares
from time to time in order to generate cash. In addition, the Jubilee shares
would be available to pledge as collateral for a loan. We transferred 131,000 of
our Jubilee shares to our investment bankers, Technology Partners (Holdings)
LLC, in payment for services rendered in the Jubilee
transaction.
The shares issued to Jubilee by USA Technologies are not registered under
the Securities Act of 1933, as amended. The Jubilee shares issued to USA
Technologies are admitted to listing on the London Stock Exchange under the
symbol JIT. At the present time, there is not an established trading market for
Jubilee shares. USA Technologies has agreed not to sell the Jubilee shares for a
period of 90 days from January 24, 2003, and to sell a maximum of 10% of the
Jubilee shares during each month thereafter. Jubilee has agreed not to sell USA
Technologies` shares for a period of two (2) years from the date of issuance
unless USA Technologies agrees otherwise. USA Technologies has agreed to use its
best efforts to file an appropriate Registration Statement with the Securities
and Exchange Commission no later than June 30, 2003 registering all of the
shares issued to Jubilee for resale under the Act and to use its best efforts to
keep such registration statement effective for a period of three years.
In November 2002 and through April 4, 2003, the Company sold an aggregate
of 13,327,880 shares to 126 accredited investors at $.10 per share for a total
of $1,332,788. The offer and sale of the shares was exempt from registration
under Rule 506 promulgated under the Act. We have agreed to register the shares
under the Act for resale at our cost and expense for a period of 2 years.
In March 2003, we issued warrants to La Jolla Cove Investors, Inc. to
purchase up to 9,000,000 shares at $.10 per share. The warrants expire as
follows: 3,000,000 on the three month anniversary of the date of this
prospectus; 3,000,000 on the 6 month anniversary of the date of this prospectus;
and 3,000,000 on the 9 month anniversary of the date of this prospectus. The
warrants may not be exercised without our consent on any date on which the
closing price of our shares is less than $.40. We have agreed to register the
shares underlying the warrants for resale under the Act for a period of one
year. The warrants were offered and sold to La Jolla pursuant to the exemption
from registration set forth in Section 4(2) of the Act.
In April 2003, we issued 551,327 shares and warrants to purchase up to
551,327 shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended March
31, 2003. The shares were purchased at the rate of $.20 per share and the
warrants are exercisable at $.20 per share at any time through June 30, 2004. We
have agreed to register the shares and the shares underlying the warrants under
the Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and there was no
general solicitation or advertising.
From November 2002 through March 31, 2003, the holders of the noteholder
warrants issued in November 2002 exercised warrants for 6,491,691 shares at $.10
per share for a total of $649,169.
33
BUSINESS
USA Technologies, Inc., a Pennsylvania corporation (the "Company") was
founded in January 1992. Currently, the Company`s core business is its cashless
payment and control network. The equipment component of the network is e-Port,
or TransAct , and any associated equipment such as copiers, computers or
vending machines. When sold to hotels, the TransAct plus office equipment is
called the Business ExpressR. The e-Port or TransAct allows a consumer to use a
credit card to make a purchase from host equipment such as copiers, computers or
vending machines and gathers information about sales and operations of the host
equipment. The e-Port currently targets the vending industry. USA Technologies
has historically generated some revenues from the direct sale of this equipment.
A second source of revenues is generated from product sales from our Kodak
vending machines. Transaction processing revenue is recognized upon the usage of
the Company`s cashless payment and control network. Service fees for access to
the Company`s equipment and network services are recognized on a monthly basis.
The network component provides the auditing and financial services, and
results in service and transaction revenues. The auditing feature would capture
supply chain data (units sold, what sold, price of units sold) and other machine
information, and send the information back to either a customer`s network or to
the USA network for reporting. The financial feature includes acting as a `super
merchant` for our customers - thereby helping them to avoid getting certified
with credit card processors to do unattended transactions; and providing
refunds, payments, and reporting of the credit card transactions. This component
generates monthly network service fees, plus transaction processing fees from
the retention of a portion of the monies generated from all credit card
transactions conducted through its cashless payment and control network.
As of June 30, 2002, the Company had a total installed base of 1,309
control systems, primarily 727 Business Express control systems, 168 Business
Express Limited Service (LSS) control systems, and 229 standalone TransAct
control systems located at 394 hospitality locations throughout the United
States and Canada. In addition, there were 157 e-Port control systems located at
vending locations in the United States and 323 Kodak vending machines. At
December 31, 2002, the Company had a total of 1,728 terminals shipped and
installed at various hotels, vending machines, amusement parks, retail locations
and business/industry locations throughout the United States and Canada.
Our cashless payment and control network operates as follows:
- The consumer swipes a credit card through the e-Port or TransAct system.
- The e-Port or TransAct transmits the request to the credit card processor.
- The e-Port or TransAct activates the equipment for use by the consumer.
- Once the consumer finishes using the e-Port or TransAct, the control
system transmits a record of the transaction to the credit card processor.
- The credit card processor electronically transfers the proceeds derived
from the transaction, less the credit card processor`s charge (i.e.
transaction fees), to us.
- Finally, we forward money (check or electronic) to each customer
representing its share of the proceeds.
For the years ended June 30, 2002 and 2001, and for the six months ended
December 31, 2002, the Company has expensed approximately $1,187,000, $1,260,000
and $882,000, respectively for the development of its proprietary technology.
These amounts include the expense of outside consultants and contractors as well
as compensation paid to certain of the Company`s employees and is reflected in
compensation and general and administrative expense in the accompanying
consolidated financial statements. Through March 31, 2002 the Company had
capitalized approximately $5.3 million for the services of IBM, to program the
enhancements to the Company`s proprietary "USAlive" server network and to the
e-Port (TM) client. During the fourth quarter of fiscal 2002, the e-Port (TM)
product and related network became available for general release to the
Company`s customers. Management performed an evaluation of the commercial
success and preliminary market acceptance of the e-Port (TM) product and network
and, accordingly, during the fourth quarter of fiscal 2002, the Company recorded
an impairment charge of approximately $2.7 million to reflect the software
development costs at its net realizable value. See Note 2 to the Consolidated
Financial Statements.
INDUSTRY TRENDS
USA Technologies would like to participate in two important emerging market
spaces within the Internet economy: electronic commerce and pervasive computing.
USA Technologies intends to continue to further develop its proprietary
technologies, e-Port (TM) and TransAct payment systems, in order to attempt to
take advantage of two trends:
34
1. Emergence of pervasive computing/`Internet Everywhere` appliances
(Source: IDC Information Industry and Technology Update, 1999-2000, p. 29-38).
Growth in pervasive computing devices is expected to fuel growth of
Internet/e-Commerce. These intelligent or `smart` devices (e.g. vending
machines, personal digital assistants, credit card readers etc) are embedded
with microprocessors that allow users to gain direct, simple and secure access
to relevant information and services via the Internet without the need for a PC.
It is projected that two billion people will be accessing the web with
`non-PC` Internet appliances which are simple to use and less costly than a
conventional PC (e.g. digital assistants, intelligent cell phones, game
devices). Billions of vending machines, television set top boxes, automobiles,
telephones and payment devices of all types are anticipated to be embedded with
computational ability and connected to the Internet.
2. Growth in electronic commerce.
By the year 2003, it is projected by IDC (Information Industry and
Technology Update, 1999-2000, pp. 30) that 500 million Internet users will be
accessing information and conducting commerce over the Internet (versus 160
million users in 1998). This increased use would amount to two new users per
second.
CASHLESS PAYMENT PROCESSING
Each of the Company`s cashless control systems records and transmits
all transaction data to the Company, which then forwards it to the credit card
processor and related system involving the banks and the credit card companies
such as Visa, MasterCard and American Express. Based on the transaction data,
the payment for services rendered or product purchased is then electronically
transferred to the Company`s bank (less various financial charges). The
Company then forwards to the location its agreed upon share of the funds,
through check or EFT. In hospitality, if the Company has sold the business
center equipment to the location, the portion retained by the Company is
generally 5% of the gross revenues. In cases where the Company continues to own
the equipment, the portion retained can be as high as 90% of gross revenues. In
the Kodak program, charges for product have been negotiated to give Stitch a
reasonable margin. In addition the Company charges a fixed monthly management
fee which is generally $20-$25 per control system for existing hospitality
locations.
PRODUCT LINES
THE E-PORT (TM) FOR VENDING
35
In general, our wireless vending service enables:
- cashless transactions including credit cards, smart cards, student
Ids, PDAs and cell phones;
- real-time access to monitor inventory, sales, audit (cash and credit)
and machine maintenance via the internet from any PC;
- the potential of an added revenue stream with the LCD color touch
screen for displaying interactive advertising and content.
With the acquisition of Stitch Networks, the Company has acquired vending
business with Eastman Kodak. This consists of locating specially designed Kodak
vending machines in high profile venues across the United States such as
amusement parks, zoos, and sports stadiums. The vending machines dispense
disposable cameras and associated film.
The e-Port (TM) allows a consumer to use a credit card or other forms of
cashless payment to make a purchase, and also gathers information about sales
and operations of the host equipment. Additional capabilities can include
internet connectivity and wireless communications. With some additional effort,
capability for public access electronic commerce and advertising is possible.
THE BUSINESS EXPRESS (R) FOR HOTELS
The hotel/motel hospitality industry has become more competitive as chains
increase efforts to attract the most profitable customer: the business traveler
or conference attendee, who accounts for the majority of hotel occupancy, stays
longer and spends more per visit than the leisure traveler. For these reasons,
hotels have become responsive to the needs of the business traveler. The
Business Express enables a hotel to address some of these needs, while offering
the possibility of generating incremental revenue.
The Business Express utilizes the Company`s existing applications for
computers, copiers, and facsimile equipment, and combines them into a branded
product in a functional kiosk type workstation. All devices are cashless,
therefore eliminating the need for an attendant normally required to provide
such services.
Our hotel service enables:
- cashless transactions using credit cards and room cards for payment;
- access to unattended 24/7 business center services for hotel guests;
- access to vending machines for hotel guests with the use of their room
card.
E-SUDS (TM) FOR LAUNDRY
With the acquisition of Stitch Networks, the Company has acquired
additional product line enhancements. One such enhancement is our university
laundry services which enable:
36
- students to go on-line and check the availability of laundry machines
and receive email or a page when their laundry cycles are complete;
- students to charge the cost of their laundry to their credit card or
student account;
- laundry operators to access inventory, sales, audit and maintenance
via the internet from any PC;
- laundry operators to benefit from additional revenue through the sale
of detergent automatically added to the wash cycle.
MARKETING
As of June 30, 2002, the Company was marketing and selling its products
through its full time staff consisting of six people. The Company is primarily
focused on the vending, hospitality, office equipment and laundry industries.
In the vending industry, the e-Port (TM) is being purchased by soft drink
bottlers and independent vending operators throughout the USA and Canada. On the
soft drink bottler side, heavy effort is being put into securing initial
distribution agreements with the top ten Coke and Pepsi bottlers, and Dr.
Pepper. The initial installations of e-Port (TM)s are already complete for a
number of bottlers. Three of the premier national independent vending operators,
Compass, ARAMARK and Sodexho, have already installed e-Port (TM) in various
locations. One major vending operator, International Vending Management, has
signed a contract with the Company although nominal revenues have resulted to
date from this contract.
In March 2002, the Company signed an agreement with MEI (Mars Electronics),
who agreed to sell and distribute an MEI branded cashless payment system to be
developed by the Company, as part of its portfolio of vending solutions. By
contract, MEI has committed to buy a minimum of 10,000 unit of the USA product
over the course of 24 month agreement or pay the Company $4.00 per unit for any
shortfall. As of the date of this prospectus, no revenues have been generated
from this contract.
37
The Company continues to work with the top vending machine manufacturers in
order to incorporate our e-Port (TM) technology into vending machines at the
factory (OEM); and with authorized resellers. In the hospitality industry,
Business Express continues to be one of the premier solutions for automated
business centers. The addition of e-Port (TM) technology for vending machines
located in hotels now offers a "one-stop shopping" experience to hotels who also
have or are considering purchasing a USA business center. In laundry, American
Sales Inc. (ASI) signed a five year agreement to purchase units of Stitch`s
e-Suds laundry solution for their university locations in the Midwest. Through
the date of this prospectus, no units have been purchased by ASI.
In October, 2002, the Company signed a Strategic Alliance Agreement with
ZiLOG Corporation, a semiconductor company which is the largest supplier of
microprocessors to the retail point of sale industry. The agreement allows the
Company`s proprietary network software (USAlive) to be embedded on a chip
produced by ZiLOG. The Company would license its software to the purchaser and
would receive a license fee. A second revenue stream could be generated when
those who buy the retail point of sales terminals begin to use them, because
they could elect to use the USA network which is embedded on the chip
procurement. As of the date of this prospectus, no products have been available
for commercial use and accordingly, no revenues have been generated.
The Company`s e-Port (TM) can be manufactured for us by an independent
contract manufacturer, RadiSys. Product orders to RadiSys are governed by the
Design and Manufacturing Agreement signed in June, 2000. In March, 2001, a
manufacturing agreement between the Company and Masterwork Electronics was
signed, to provide the Company with additional manufacturing capability for
e-Port (TM).
The Company anticipates obtaining the other components of its business
center (computers, printers, fax and copy machines) through Decision One and
CDW. Orders are regularly placed for expected orders weeks in advance.
38
COMPETITION
We are aware of three competitors who offer unattended business centers in
the hospitality industry in competition with the Business Express. We believe
that our products (currently located in 400 locations) are in approximately
seventy-five percent of the locations currently utilizing unattended business
centers. We are aware of one competitor in regards to our e-Port control systems
for use in the beverage vending industry. There are at the present time very few
installations of this product.
In addition, the businesses which have developed unattended, credit card
activated control systems currently in use in connection with gasoline
dispensing, public telephones, prepaid telephone cards, ticket dispensing
machines, vending machines, or facsimile machines, are capable of developing
products or utilizing their existing products in direct competition with our
e-port control systems targeted to the beverage vending industry. Many of these
businesses are well established, have substantially greater resources than the
Company and have established reputations for success in the development, sale
and service of high quality products. Any such increased competition may result
in reduced sales and/or lower percentages of gross revenues being retained by
the Company in connection with its licensing arrangements, or otherwise may
reduce potential profits or result in a loss of some or all of its customer
base. The Company is also aware of several businesses that make available use of
the Internet and use of personal computers to hotel guests in their hotel rooms.
Such services might compete with the Company`s Business Express , and the
locations may not order the Business Express , or if ordered, the hotel guest
may not use it.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company received federal registration approval of its trademarks
Business Express , C3X, TransAct , and Public PC, and has applied for federal
registration of its trademarks Copy Express and e-Port (TM). Through its wholly
owned subsidiary, Stitch Networks, the Company has secured three trademarks:
eVend.Net, eSuds.Net and Stitch Networks.
Much of the technology developed or to be developed by the Company is
subject to trade secret protection. To reduce the risk of loss of trade secret
protection through disclosure, the Company has entered into confidentiality
agreements with its key employees. There can be no assurance that the Company
will be successful in maintaining such trade secret protection, that they will
be recognized as trade secrets by a court of law, or that others will not
capitalize on certain of the Company`s technology.
Through April 2, 2003, seventeen United States patents have been issued to
us:
o U.S. Patent No. 5,619,024 entitled "Credit Card and Bank Issued
Debit Card Operating System and Method for Controlling and Monitoring Access of
Computer and Copy Equipment";
o U.S. Patent No. 5,637,845 entitled "Credit and Bank Issued Debit
Card Operating System and Method for Controlling a Prepaid Card
Encoding/Dispensing Machine";
o U.S. Patent No. D423,474 entitled "Dataport";
39
- U.S. Patent No. D415,742 entitled "Laptop Dataport Enclosure";
- U.S. Patent No. D418,878 entitled "Sign Holder";
- U.S. Patent No. 6,056,194 entitled "System and Method for
Networking and Controlling Vending Machines";
- U.S. Patent No. D428,047 entitled "Electronic Commerce Terminal
Enclosure";
- U.S. Patent No. D428,444 entitled "Electronic Commerce Terminal
Enclosure for a Vending Machine";
- U.S. Patent No. 6,119,934 entitled "Credit Card, Smart Card and
Bank Issued Debit Card Operated System and Method for
Processing Electronic Transactions";
- U.S. Patent No. 6,152,365 entitled "Credit and Bank Issued
Debit Card Operated System and Method for Controlling a
Vending Machine";
- U.S. Patent No. D437,890 entitled "Electronic Commerce Terminal
Enclosure with a Hooked Fastening Edge for a Vending Machine";
- U.S. Patent No. D441,401 entitled "Electronic Commerce Terminal
Enclosure with Brackets";
- U.S. Patent No. 6,321,985 entitled "System and Method for
Networking and Controlling Vending Machines";
- U.S. Patent NO. 6,505,095 entitled "System for Providing Remote
Audit, Cashless Payment, and Interactive Transaction
Capabilities in a Vending Machine" (Stitch);
- U.S. Patent No. 6,389,337 entitled "Transacting e-commerce
and Conducting e-business Related to Identifying and Procuring
Automotive Service and Vehicle Replacement Parts" (Stitch);
- U.S. Patent No. 6,021,626 entitled "Forming, Packaging, Storing,
Displaying and Selling Clothing Articles"; and
- U.S. Patent No. 6,152,845 entitled "Credit and Bank Issued Debit
Card Operated System and Method for Controlling a Prepaid Card
Encoding/Dispensing Machine".
In addition, two foreign patents, Canadian Patent No. D87998 entitled "Sign
Holder" and Canadian Patent No. D91645 entitled "Laptop Data Port Enclosure"
have been issued to USA. The Company has 39 patents pending and 22 patents have
received notices of allowance as of April 2, 2003.
The Company believes that the U.S. patent No. 6,505,095 entitled "System
for providing remote audit, cashless payment, and interactive transaction
capabilities in a vending machine" is very important in protecting its
intellectual property used in its e-Port control system targeted to the vending
industry. The patent expires in July 2021.
Employees
On December 31, 2002, we had 31 full-time employees.
Properties
We lease our principal executive offices, consisting of approximately
10,000 square feet, at 200 Plant Avenue, Wayne, Pennsylvania for a monthly
rental of $14,000 plus utilities and operating expenses. The lease expired on
June 30, 2002, and subsequently, the Company has leased these facilities on a
month-to-month basis. With the acquisition of Stitch Networks, the Company
acquired 12,225 square feet of rented space in Kennett Square, PA. The rent is
$11,153 per month and the lease expires on March 2005. The Company is
consolidating facilities, and therefore Stich has vacated the rented space in
Kennett Square. For that reason, the Company has accrued for the remaining
payments of the lease of approximately $354,000 as part of the Stitch purchase
price as of June 30, 2002 (see Note 3 to the Consolidated Financial Statements).
The Company is attempting to secure a tenant to sublease the space for the
duration of the lease and Stitch is in default under the lease since August,
2002. During the quarter ended September 30, 2002, the Company also signed a
lease for 16.5 months at $4,000 per month for additional space in Malvern, PA
for business activities.
40
Where to get more information
We file annual, quarterly and special reports and other information with
the SEC. You may read and copy any document we file with the SEC at the SEC`s
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the public reference room by calling the
SEC at 1-800-SEC-0330. The same information may be obtained at the following
Regional Office of the SEC: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can also be obtained from the Public
Reference Section of the SEC`s Washington, D.C. office at prescribed rates.
Our filings may also be accessed through the SEC`s web site
(http://www.sec.gov). We will provide a copy of any or all documents
incorporated by reference herein (exclusive of exhibits unless such exhibits are
specifically incorporated by reference therein), without charge, to each person
to whom this prospectus is delivered, upon written or oral request to USA
Technologies, Inc., 200 Plant Avenue, Wayne, Pennsylvania 19087, Attn: George R.
Jensen, Jr., Chief Executive Officer (telephone (610) 989-0340).
We will furnish record holders of our securities with annual reports
containing financial statements audited and reported upon by our independent
auditors, quarterly reports containing unaudited interim financial information,
and such other periodic reports as we may determine to be appropriate or as may
be required by law.
MANAGEMENT
Directors and Executive Officers
Our Directors and executive officers, on the date of this Prospectus,
together with their ages and business backgrounds were as follows.
Name Age Position(s) Held
---- --- ----------------
George R. Jensen, Jr. 54 Chief Executive Officer,
Chairman of the Board of Directors
Stephen P. Herbert 40 President, Director
Haven Brock Kolls, Jr. 37 Vice President - Research and
Development
Leland P. Maxwell 56 Senior Vice President, Chief
Financial Officer, Treasurer
Michael K. Lawlor 41 Vice President - Marketing and
Sales
William W. Sellers (1)(2) 80 Director
William L. Van Alen, Jr. (1)(2) 67 Director
Steven Katz (1) 52 Director
Douglas M. Lurio (2) 46 Director
Edwin R. Boynton 47 Director
Kenneth C. Boyle 38 Director
(1) Member of Compensation Committee
(2) Member of Audit Committee
Each Director holds office until the next Annual Meeting of shareholders
and until his successor has been elected and qualified.
George R. Jensen, Jr., has been our Chief Executive Officer and a Director
since our inception in January 1992. Mr. Jensen was Chairman, Director, and
Chief Executive Officer of American Film Technologies, Inc. ("AFT") from 1985
until 1992. AFT was in the business of creating color imaged versions of
black-and-white films. From 1979 to 1985, Mr. Jensen was Chief Executive Officer
41
and President of International Film Productions, Inc. Mr. Jensen was the
Executive Producer of the twelve hour miniseries, "A.D.", a $35 million dollar
production filmed in Tunisia. Procter and Gamble, Inc., the primary source of
funds, co-produced and sponsored the epic, which aired in March 1985 for five
consecutive nights on the NBC network. Mr. Jensen was also the Executive
Producer for the 1983 special for public television, "A Tribute to Princess
Grace". From 1971 to 1978, Mr. Jensen was a securities broker, primarily for the
firm of Smith Barney, Harris Upham. Mr. Jensen was chosen 1989 Entrepreneur of
the Year in the high technology category for the Philadelphia, Pennsylvania area
by Ernst & Young LLP and Inc. Magazine. Mr. Jensen received his Bachelor of
Science Degree from the University of Tennessee and is a graduate of the
Advanced Management Program at the Wharton School of the University of
Pennsylvania.
Stephen P. Herbert was elected a Director in April 1996, and joined USA on
a full-time basis on May 6, 1996. Prior to joining us and since 1986, Mr.
Herbert had been employed by Pepsi-Cola, the beverage division of PepsiCo, Inc.
From 1994 to April 1996, Mr. Herbert was a Manager of Market Strategy. In such
position he was responsible for directing development of market strategy for the
vending channel and subsequently the supermarket channel for Pepsi-Cola in North
America. Prior thereto, Mr. Herbert held various sales and management positions
with Pepsi-Cola. Mr. Herbert graduated with a Bachelor of Science degree from
Louisiana State University.
Haven Brock Kolls, Jr., joined USA on a full-time basis in May 1994 and was
elected an executive officer in August 1994. From January 1992 to April 1994,
Mr. Kolls was Director of Engineering for International Trade Agency, Inc., an
engineering firm specializing in the development of control systems and
management software packages for use in the vending machine industry. Mr. Kolls
was an electrical engineer for Plateau Inc. from 1988 to December 1992. His
responsibilities included mechanical and electrical computer-aided engineering,
digital electronic hardware design, circuit board design and layout, fabrication
of system prototypes and software development. Mr. Kolls is a graduate of the
University of Tennessee with a Bachelor of Science Degree in Engineering.
Leland P. Maxwell joined USA on a full-time basis on February 24, 1997 as
Chief Financial Officer, Senior Vice President and Treasurer. Prior to joining
us, Mr. Maxwell was the corporate controller for Klearfold, Inc., a
privately-held manufacturer of specialty consumer packaging. From 1992 to 1996,
Mr. Maxwell was the regional controller for Jefferson Smurfit/Container
Corporation of America, a plastic packaging manufacturer, and from 1986 to 1992
was the divisional accounting manager. Prior thereto, he held financial
positions with Safeguard Business Systems and Smithkline-Beecham. Mr. Maxwell
received a Bachelor of Arts degree in History from Williams College and a Master
of Business Administration-Finance from The Wharton School of the University of
Pennsylvania. Mr. Maxwell is a Certified Public Accountant.
Michael K. Lawlor joined USA on a full-time basis in 1997 and was promoted
to Senior Vice President, Sales and Marketing in September 1999. Prior to
joining us, Mr. Lawlor worked with Aladdin Industries, a leading manufacturer of
promotional drinkware, as Director of Restaurant Sales. From 1986 to 1995, Mr.
Lawlor was employed in various sales capacities by Pepsi-Cola and was National
Accounts Sales Manager when he departed in 1995. Mr Lawlor received an
undergraduate degree in Marketing from the University of Texas.
42
William W. Sellers joined the Board of Directors of USA in May 1993. Mr.
Sellers founded The Sellers Company in 1949 which has been nationally recognized
as the leader in the design and manufacture of state-of-the-art equipment for
the paving industry. Mr. Sellers has been awarded five United States patents and
several Canadian patents pertaining to this equipment. The Sellers Company was
sold to Mechtron International in 1985. Mr. Sellers is Chairman of the Board of
Sellers Process Equipment Company which sells products and systems to the food
and other industries. Mr. Sellers is actively involved in his community. Mr.
Sellers received his undergraduate degree from the University of Pennsylvania.
William L. Van Alen, Jr., joined the Board of Directors of USA in May 1993.
Mr. Van Alen is President of Cornerstone Entertainment, Inc., an organization
engaged in the production of feature films of which he was a founder in 1985.
Since 1996, Mr. Van Alen has been President and a Director of The Noah Fund, a
publicly traded mutual fund. Prior to 1985, Mr. Van Alen practiced law in
Pennsylvania for twenty-two years. Mr. Van Alen received his undergraduate
degree in Economics from the University of Pennsylvania and his law degree from
Villanova Law School.
Steven Katz joined the Board of Directors in May 1999. He is President of
Steven Katz & Associates, Inc., a management consulting firm specializing in
strategic planning and corporate development for technology and service-based
companies in the health care, environmental, telecommunications and Internet
markets. Mr. Katz`s prior experience includes five years with Price Waterhouse &
Co. in audit, tax and management advisory services; two years of corporate
planning with Revlon, Inc.; five years with National Patent Development
Corporation (NPDC) in strategic planning, merger and acquisition, technology
in-licensing and out-licensing, and corporate turnaround experience as President
of three NPDC subsidiaries; and two years as a Vice President and General
Manager of a non-banking division of Citicorp, N.A.
Douglas M. Lurio joined the Board of Directors of USA in June 1999. Mr.
Lurio is President of Lurio & Associates, P.C., attorneys-at-law, which he
founded in 1991. He specializes in the practice of corporate and securities law.
Prior thereto, he was a partner with Dilworth, Paxson LLP. Mr. Lurio received a
Bachelor of Arts Degree in Government from Franklin & Marshall College, a Juris
Doctor Degree from Villanova Law School, and a Masters in Law (Taxation) from
Temple Law School.
Edwin R. Boynton joined the Board of Directors in July 1999. He is a
partner of Stradley Ronon Stevens & Young LLP, and is a member of and currently
the chair of the firm`s estates department. Mr. Boynton received his bachelor of
arts degree from Harvard University in 1976 and his Juris Doctor degree from
Duke University in 1979.
Kenneth C. Boyle joined the Board of Directors in May 2002. Mr. Boyle
is the Vice President & General Manager - eBusiness of the Maytag Corporation.
He leads Maytag`s global eBusiness unit, which explores and develops e-commerce
opportunities and Web enabled business models that support profitable growth
across Maytag`s business units. He is responsible for all eBusiness efforts at
the corporate level as well as business and brand specific activities at the
operating unit level, inclusive of partnerships and strategy development. Prior
to Maytag, Mr. Boyle served as a director of business development with iXL, a
major global e-consulting firm. He was responsible for developing long-term,
strategic relationships with Global 2000 companies and assisting them with
consulting services to transform their traditional business models by leveraging
Internet technology. Mr. Boyle began his career with Delta Air Lines. His
ten-year career with Delta included management positions in sales and marketing
and founding Delta`s e-commerce department. While there he led the development
and implementation of initiatives to drive sales via the Internet,
Internet-connected kiosks, smart card programs and other digital avenues.
43
Executive Compensation
The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the fiscal years ended June
30, 2000, June 30, 2001 and June 30, 2002 to each of the executive officers and
employee of the Company named below.
SUMMARY COMPENSATION TABLE
Fiscal
Name and Principal Position Year Annual Compensation Long Term Compensation(4)
---------------------------- ------ ---------------------- ---------------------------
Salary Bonus Other Annual Restricted Stock
(1) Compensation Awards
------ ----- ----- -------------- ---------------------------
George R. Jensen, Jr., 2002 $135,000 $288,000 $80,000 (3) --
Chief Executive Officer 2001 $135,000 $140,000 -- --
2000 $117,500 $ 80,000 -- --
---------------------------------------------------------------------------------------------------------
Stephen P. Herbert, 2002 $125,000 $270,000 $80,000 (3) --
President 2001 $125,000 $134,40 -- --
2000 $107,500 $174,000 -- --
---------------------------------------------------------------------------------------------------------
Leland P. Maxwell, Chief 2002 $110,308 $151,200 -- --
Financial Officer, Treasurer 2001 $108,000 $44,240 -- --
2000 $ 99,000 $29,000 -- --
---------------------------------------------------------------------------------------------------------
H. Brock Kolls, Senior Vice 2002 $125,769 $180,000 $50,000 (3) --
President, Research & 2001 $120,000 $ 97,440 -- --
Development 2000 $105,000 $124,000 -- --
---------------------------------------------------------------------------------------------------------
Michael K. Lawlor, Senior 2002 $103,846 $151,200 -- --
Vice President, Sales and 2001 $100,000 $ 38,640 -- --
Marketing 2000 $ 83,200 $ 45,500 $43,000 (2) --
---------------------------------------------------------------------------------------------------------
Adele H. Hepburn 2002 $ 91,000 $472,609 -- --
Director of Public Relations 2001 $ 91,000 $171,700 -- --
2000 $ 91,000 $147,800 -- --
---------------------------------------------------------------------------------------------------------
44
(1) For fiscal year 2000, represents shares of Common Stock issued to the
executive officers during the fiscal year valued at $2.00 per share, the closing
bid price on the date of issuance. For Mr. Lawlor, the bonus also includes a
$5,500 sales commission. For fiscal year 2001, represents shares of Common
Stock issued to the executive officers during the fiscal year valued at $1.12
per share, the closing bid price on the date of issuance. For Mr. Lawlor, the
bonus also includes $1,265 sales commission. For fiscal year 2002, represents
shares of Common Stock issued to the executive officers valued at $.45 per
share, which was the market value on the date of grant (Mr. Jensen-640,000
shares; Mr. Herbert-600,000 shares; Mr. Kolls-400,000 shares; Mr. Maxwell-
260,000 shares; and Mr. Lawlor-260,000 shares). For Mr. Maxwell and Mr. Lawlor
in 2002, the bonus also includes 90,000 shares of Common Stock valued at $.38,
which was the market price on the day of grant. This stock was awarded to
reimburse them for tax payments incurred as a result of the award of a
previous bonus. For Adele Hepburn in fiscal 2002, the bonus includes
$408,267 of non cash compensation, as follows: 435,334 shares of Common Stock
at $.60; 384,334 shares at $.10; and a $108,834 2001 - D 12% Senior Notes due
December 31, 2003.
(2) Represents cash payment by the Company of relocation expenses.
(3) Represents cash payments authorized to reimburse certain executive
officers for tax payments incurred from the award of a previous bonus.
(4) In July 1999, the Company extended the expiration dates until June 30,
2001 of the options to acquire Common Stock held by the following directors,
officers, and employees: Adele Hepburn - 77,000 options; H. Brock Kolls - 20,000
options; William Sellers - 15,500 options; and William Van Alen - 12,500
options. All of the foregoing options would have expired in the first two
45
calendar quarters of the year 2000 or the first calendar quarter of year 2001.
In February, 2001, all these options were further extended until June 30, 2003,
and in addition the expiration dates of the following additional options were
also extended to June 30, 2003: H. Brock Kolls - 20,000 options; Stephen Herbert
- 40,000 options; Michael Lawlor - 3,750 options; George Jensen - 200,000
options. In October 2000, the Company issued to George R. Jensen, Jr., fully
vested options to acquire up to 200,000 shares of Common Stock at $1.50 per
share. The options were exercisable at any time within two years following
issuance. In February 2001, the Company extended the expiration date of these
options until June 30, 2003. Effective December 31, 2002, all of the outstanding
options (whether vested or un vested) then held by each of Messrs. Jensen,
Herbert, Kolls, Maxwell, Sellers, Van Alen, Katz, Lurio and Boynton were
voluntarily canceled by each of the foregoing individuals.
The following table sets forth information regarding stock options
granted during the fiscal year 2002 to the executive officers of the Company
and an employee named below:
OPTION GRANTS DURING FISCAL YEAR ENDED JUNE 30, 2002
Name Number of Percent of Exercise Expiration
Securities Total Options Price Date
Underlying Granted to Per
Options Employees in Share($)
Granted(#) Fiscal Year (%)
-----------------------------------------------------------------------------------------------------------
George R. Jensen, Jr. 320,000(1) 9.6 $.40 June 30, 2003
-----------------------------------------------------------------------------------------------------------
Stephen P. Herbert 300,000(1) 9.0 $.40 June 30, 2003
-----------------------------------------------------------------------------------------------------------
Leland P. Maxwell 130,000(1) 3.9 $.40 June 30, 2003
-----------------------------------------------------------------------------------------------------------
H. Brock Kolls 50,000 1.5 $.40 April 15, 2005
200,000(1) 6.0 $.40 June 30, 2003
-----------------------------------------------------------------------------------------------------------
Michael K. Lawlor 130,000(1) 3.9 $.40 June 30, 2003
-----------------------------------------------------------------------------------------------------------
Adele H. Hepburn 200,000 6.0 $.70 June 30,2003
300,000 9.0 $.40 November 23, 2003
-----------------------------------------------------------------------------------------------------------
46
(1) Represents shares issued by the Company during January 2002 in satisfaction
of options issued in November 2001 at no cost to the named executive officer.
The shares have been valued at $.45 per share, the price on the date of
issuance. The value of these shares has been included in the Summary
Compensation Table set forth above.
TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2002 AND YEAR END VALUES
This table gives information for options exercised by each of the named
executive officers in fiscal year 2002, and the number of options held by these
executive officers and an employee at fiscal year end.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the -Money
Options at Options at
FY-End (#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name On Exercise (#) Value Realized ($) Unexersisabble Unexercisable
---------------------------------------------------------------------------------------------------------
George R. Jensen, Jr. 320,000(1) 144,000 446,666/ 0
33,334
---------------------------------------------------------------------------------------------------------
Stephen P. Herbert 300,000(1) 135,000 263,334/ 0
26,666
---------------------------------------------------------------------------------------------------------
Leland P. Maxwell 130,000(1) 58,500 103,334/ 0
16,666
---------------------------------------------------------------------------------------------------------
H. Brock Kolls 200,000(1) 90,000 273,334/ 0
26,666
---------------------------------------------------------------------------------------------------------
Michael K. Lawlor 130,000(1) 58,500 83,334/ 0
16,666
---------------------------------------------------------------------------------------------------------
Adele H. Hepburn 0 0 577,000/ 0
0
---------------------------------------------------------------------------------------------------------
47
(1) Represents shares issued by the Company during January 2002 in satisfaction
of options issued in November 2001 at no cost to the named executive officer.
The shares have been valued at $.45 per share, the price on the date of
issuance. The value of these shares has been included in the Summary
Compensation Table set forth above.
48
DIRECTOR COMPENSATION
COMPENSATION OF DIRECTORS
Members of the Board of Directors do not currently receive any cash
compensation for serving on the Board of Directors or any Committee thereof.
In April 2002, the Company granted to each of the five outside Directors
(Messrs. Sellers, Van Alen, Katz, Lurio, and Boynton) options to purchase up to
100,000 shares of Common Stock at $.40 per share as compensation for serving the
one-year term which commenced March 21, 2002. The options are fully vested and
are exercisable at any time prior to April 12, 2005. Commencing on July 1, 2002
and at any and all times through June 30, 2003, each Director has been granted
the right, without the payment of the per share exercise price of such options,
to receive up to 50,000 shares represented by those options. In September 2002,
Edwin P. Boynton elected to receive 50,000 shares in lieu of the above options.
In February 2001, the Company granted a total of 300,000 options to
purchase Common Stock at $1.00 per share to each of the then outside members of
the Board (Messrs. Sellers, Van Alen, Smith, Katz, Lurio, and Boynton). Of
these, 120,000 options vested immediately; 90,000 options vested on June 30,
2001; and 90,000 vested on June 30, 2002. The options are exercisable at any
time within five years following the vesting.
The Company has agreed to use its best efforts to register for resale all
of the Common Stock underlying the above options under the Securities Act of
1933, as amended ("Act"), at the Company`s cost and expense. All of the
foregoing options are non-qualified stock options and not part of a qualified
stock option plan and do not constitute incentive stock options as such term is
defined under Section 422 of the Internal Revenue Code, as amended, and are not
part of an employee stock purchase plan as described in Section 423 thereunder.
On December 31, 2002, each of Messrs. Sellers, Van Alen, Katz, Lurio, and
Boynton voluntarily canceled all of the outstanding options then held by them.
49
PRINCIPAL SHAREHOLDERS
COMMON STOCK
The following table sets forth, as of December 31, 2002, the beneficial
ownership of the Common Stock of each of the Company`s directors and executive
officers, the other employee named in the Summary Compensation Table set forth
below, as well as by the Company`s directors and executive officers as a group.
Except as set forth below, the Company is not aware of any beneficial owner of
more than five percent of the Common Stock. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.
50
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- ------------
George R. Jensen, Jr. 759,000(3) *
517 Legion Road
West Chester, Pennsylvania 19382
Stephen P. Herbert 486,050(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 104,725(5) *
1573 Potter Drive
Pottstown, PA 19464
Leland P. Maxwell 277,050 *
401 Dartmouth Road
Bryn Mawr, Pennsylvania 19010
Michael K. Lawlor 407,050(6) *
131 Lisa Drive
Paoli, PA 19301
Edwin R. Boynton 327,887(7) *
104 Leighton Drive
Bryn Mawr, Pennsylvania 19010
Douglas M. Lurio 257,213(8) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103
William W. Sellers 912,108(9) *
394 East Church Road
King of Prussia, Pennsylvania 19406
William L. Van Alen, Jr. 274,005(10) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028
Kenneth C. Boyle 126,188 (11) *
403 West Fourth Street North
Newton, Iowa 50208
51
Adele H. Hepburn
208 St. Georges Road
Ardmore, Pennsylvania 19003 2,316,983(12) 1.19%
Kazi Management VI, Inc.
30 Dronningens Gade, Suite B 30
St. Thomas, Virgin Islands 00802 22,857,145(13) 11.7%
All Directors and Executive Officers
As a Group (11 persons) 3,931,276(14) 2.02%
---------
*Less than one percent (1%)
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or investment
power with respect to securities. Shares of Common Stock issuable upon
conversion of the Preferred Stock, or shares of Common Stock issuable upon
exercise of options currently exercisable, or exercisable within 60 days of
December 31, 2002, are deemed to be beneficially owned for purposes hereof.
(2) On December 31, 2002 there were 99,096,167 shares of Common Stock and
529,132 shares of Series A Preferred Stock issued and outstanding. For purposes
of computing the percentages under this table, it is assumed that all shares of
issued and outstanding Preferred Stock have been converted into shares of Common
Stock, that all of the options to acquire Common Stock which have been issued
and are fully vested as of December 31, 2002 (or within 60-days thereof) have
been converted into shares of Common Stock, that all Common Stock Purchase
Warrants have been exercised, that all of the Senior Notes have been converted
into shares of Common Stock, that all of the Convertible Debentures have been
converted and related Warrants have been exercised into shares of Common Stock,
and that all of the accrued and unpaid dividends on the Preferred Stock have
been converted into shares of Common Stock. Therefore, for purposes of computing
the percentages under this table, there are 189,767,761 shares of Common Stock
issued and outstanding.
(3) Includes 438,000 shares issuable upon conversion of Senior Notes, 86,000
shares of Common Stock beneficially owned by his spouse and 135,000 shares
issuable upon exercise of warrants. Does not include the right granted to Mr.
Jensen under his Employment Agreement to receive seven percent (7%) of the
issued and outstanding Common Stock upon the occurrence of a USA Transaction (as
defined therein). See "Executive Employment Agreements".
(4) Includes 1,000 shares of Common Stock beneficially owned by his child.
(5) Includes 16,500 shares of Common Stock owned by his spouse, 24,000 shares
issuable to his spouse upon conversion of her Senior Note, and 22,500 shares
issuable upon exercise of warrants held by his spouse.
(6) Includes 130,000 shares beneficially owned by his spouse.
(7) Includes 8,100 shares of Common Stock issuable upon conversion of shares of
Series A Preferred Stock. Includes 47,250 shares issuable upon conversion of
Senior Notes and 24,375 shares issuable upon exercise of warrants. Does not
52
include any shares of Common Stock issuable upon conversion of any accrued and
unpaid dividends in the Series A Preferred Stock.
(8) Includes 42,213 shares of Common Stock held jointly with Mr. Lurio`s spouse,
99,000 shares issuable upon conversion of Senior Notes and 33,750 shares
issuable upon exercise of warrants.
(9) Includes 17,846 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 4952 shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, and 10,423 shares of Common
Stock owned by Mr. Seller`s wife. Includes 199,167 shares of Common Stock
issuable upon exercise of Warrants, and 119,170 shares issuable upon conversion
of his Senior Notes.
(10) Includes 4,000 shares owned by his spouse, 108,335 shares underlying his
Senior Notes, and 88,336 shares issuable upon exercise of warrants.
(11) Represents shares underlying options.
(12) Includes 52, 275 shares held by her spouse, 5,150 shares underlying Series
A Preferred Stock held by her and her spouse, 856,085 shares underlying her
Senior Notes and 68,648 shares underlying her spouse`s Senior Notes, 235,375
shares issuable upon exercise of warrants held by her and 22,274 shares issuable
upon exercise of warrants held by her spouse, and 277,000 shares underlying
options held by her and 5,000 shares underlying options held by her spouse.
(13) Includes 19,285,716 shares underlying warrants. Zubair Kazi, an individual,
is the owner and President of Kazi Management VI, Inc. and would also be deemed
the beneficial owner of all 22,857,145 shares under the applicable rules of the
Securities and Exchange Commission.
(14) Includes all shares of Common Stock described in footnotes (2) through (11)
above.
53
SERIES A PREFERRED STOCK
The following table sets forth, as of December 31, 2002 the beneficial
ownership of the Preferred Stock by the Company`s directors and executive
officers, the other employee named in the Summary Compensation Table set forth
below, as well as by the Company`s directors and executive officers as a group.
Except as set forth below, the Company is not aware of any beneficial owner of
more than five percent of the Preferred Stock. Except as otherwise indicated,
the Company believes that the beneficial owners of the Preferred Stock listed
below, based on information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.
Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
-------------------- ------------------ -----------
Edwin R. Boynton
104 Leighton Avenue
Bryn Mawr, Pennsylvania 19010 8,100 1.5%
54
Adele H. Hepburn
208 St. Georges Road
Ardmore, Pennsylvania 19003 5,150(2) *
All Directors and Executive
Officers As a Group (11 persons) 8,100 1.5%
--------------
* Less than one percent (1%)
(1) There were 529,132 shares of Preferred Stock issued and outstanding as of
December 31, 2002.
(2) Includes 2,000 shares held by her spouse.
CERTAIN TRANSACTIONS
On December 31, 2000, Stitch Networks Corporation ("Stitch") executed a
Vending Placement, Supply and Distribution Agreement with Eastman Kodak
Company, Maytag Corporation and Dixie Narco, Inc., which formed a
strategic alliance to market and execute a national vending program for the sale
of one-time use camera and film products. The Agreement provides for an initial
term of three years ending December 31, 2003, with additional provisions for
early termination and extensions as defined. Furthermore, the Agreement also
provides for exclusivity among the parties for the term of the Agreement
relating to the sale of camera and film products from vending machines within
the Continental United States. Pursuant to this agreement, Stitch, the
Company`s subsidiary, purchases vending machines from Dixie-Narco, Inc.
("Dixie"). Dixie is owned by Maytag Corporation which is the owner of the
Company`s shareholder, Maytag Holdings, Inc. Mr. Boyle, a Director of the
Company, is a Vice President of Maytag Corporation. There were no purchases
from Dixie for the period May 14, 2002 (the date Stitch was acquired by the
Company) to June 30, 2002. Amounts payable to Dixie of $124,333 are included in
accounts payable in the June 30, 2002 consolidated balance sheet of the Company.
During the fiscal years ended June 30, 2002 and June 30, 2001, the Company
paid Lurio & Associates, P.C., of which Mr. Lurio is President and a
shareholder, professional fees of approximately $209,000 and $220,000
respectively, for legal services rendered to the Company by such law firm.
During the years ended June 30, 2002 and 2001, the Company accrued approximately
$213,000 and $271,000, respectively, for these services. Mr. Lurio is a Director
of the Company.
In October 2002, the Company approved the issuance to each of George R.
Jensen, Jr., our Chief Executive Officer, and Stephen P. Herbert, our President
and Chief Operating Officer, of $100,000 of the senior note offering.
Pursuant thereto, each of them will receive a $100,000 12% senior note due
December 31, 2005, and 200,000 shares of Common Stock. Mr. Jensen earned $60,000
of the senior note and 120,000 of these shares in November 2002 for services
rendered in the 2002 calendar year. The remaining $40,000 senior note and 60,000
shares will be earned by Mr. Jensen on March 15, 2003 if he is then employed by
the Company on account of services rendered during the 2003 calendar year. All
of Mr. Herbert`s senior note and shares will be earned by him on March 15, 2003
if he is then employed by the Company on account of services rendered during the
2003 calendar year. In October 2002, the Company approved the issuance of
$100,000 of the senior note offering to Adele Hepburn for services rendered
during the 2002 calendar year (subject to final Board of Director approval).
55
SELLING SHAREHOLDERS
Each of the selling shareholders listed below is, as of the date hereof,
the holder of our common stock or has the right to acquire the number of shares
of common stock set forth opposite such selling shareholder`s name. The issuance
of the common stock to the selling shareholders as well as the issuance of the
common stock to the selling shareholders upon exercise of the warrants or
options or upon conversion of the convertible senior notes was or will be a
transaction exempt from the registration requirements of the Act and various
state securities laws.
We have agreed, at our expense, to register all of the common stock for
resale by the selling shareholders under the Act. We expect to incur expenses of
approximately $65,000 in connection with the registration statement of which
this prospectus is a part.
The number of shares that may be actually sold by the selling
shareholder will be determined by the selling shareholder. The selling
shareholders are under no obligation to sell all or any portion of the shares
offered, nor are the selling shareholders obligated to sell such shares
immediately under this Prospectus. Particular selling shareholders may not have
a preset intention of selling their shares and may offer less than the number of
shares indicated. Because the selling shareholder may sell all, some or none of
the shares of common stock that the selling shareholder holds, no estimate can
be given as to the number of shares of our common stock that will be held by the
selling shareholder upon termination of the offering. Shares of common stock may
be sold from time to time by the selling shareholders or by pledgees, donees,
transferees or other successors in interest.
The following tables set forth information with respect to each selling
shareholder and the respective amounts of common stock that may be offered
pursuant to this prospectus. None of the selling shareholders has, or within the
past three years has had, any position, office or other material relationship
with us, except as noted below. Except as specifically set forth below,
following the offering, and assuming all of the common stock offered hereby has
been sold, none of the selling shareholders will beneficially own one percent
(1%) or more of the common stock.
56
STITCH COMMON STOCK OPTIONS
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby(7) Number Percent
------------------- -------------- ------ -------
Scott Wasserman(3) 504,753 0 *
Dan Kearney ....... 504,753 0 *
Scott Nissenbaum(6) 252,377 0 *
David Goodman(1) .. 126,188 9,489,889 4.8%
Ritchie Snyder .... 126,188 0 *
Diane Goodman(1) .. 126,188 9,489,889 4.8%
Roger Scholten(4) . 126,188 8,346,191 4.3%
Kenneth Boyle(2) .. 126,188 0 *
Mike Bolton(5) .... 126,188 4,926,260 2.5%
Scott Rosenthal ... 79,082 0 *
Wendy Jenkins(3) .. 79,082 0 *
Alex Kane ......... 55,358 0 *
Mark Rooney ....... 39,541 0 *
Ken May ........... 23,725 0 *
Matthew Heilman ... 19,771 0 *
Erika Bender(3) ... 15,816 0 *
Susan Ledyard ..... 11,862 0 *
Chris Keane ....... 11,862 0 *
Aaron Watkins ..... 11,862 0 *
Staci Spitzer ..... 11,862 0 *
Jim Rosemary ...... 11,862 0 *
Doke Scott ........ 11,862 0 *
Maeve McKenna ..... 11,862 0 *
Doug Wiggins ...... 11,862 0 *
David Vrencur ..... 7,908 0 *
Ron Wood .......... 7,908 0 *
Michael Knoll ..... 7,908 0 *
Rob Foehl ......... 7,908 0 *
Kate Jones ........ 3,954 0 *
Sean McGraw ....... 3,954 0 *
Eric Montgomery ... 3,163 0 *
Patrick Brisiel ... 3,163 0 *
Peter McNally ..... 3,163 0 *
---------
Total 2,475,318
-----------------
* less than one percent
(1) Mr. Goodman was the President and Chief Executive Officer
of Stitch until May 14, 2002. Diane Goodman is the spouse of David Goodman.
(2) Mr. Boyle is a Director of the Company.
(3) Current employee of the Company.
(4) Mr. Scholten is a Director of Maytag Holdings, Inc. which beneficially owns
8,346,191 shares of the Company.
(5) Mr. Bolton is Managing Director of Pennsylvania Early Stage Partners, GP,
L.L.C. which beneficially owns 4,926,260 shares of the Company.
(6) Former Director of the Company.
(7) Represents shares underlying options to purchase our shares that were
issued to holders of options to purchase shares of Stitch on May 14, 2002
as part of our acquisition of Stitch. The options to purchase shares of
Stitch were cancelled as part of the exchange. The options are exercisable
at any time through May 13, 2007 at $.165 per share and none have been
exercised as of the date of this prospectus. We have agreed to register
these shares for resale under the Act at our cost and expense until May 13,
2005.
57
STITCH MERGER COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby(4) Number Percent
------------------- -------------- ------ --------
David Goodman(3) ............. 9,489,889 252,376 *
Maytag Holdings, Inc. (1)..... 8,346,192 0 *
PA Early Stage Partners, LP (2) 4,926,260 0 *
----------
Total 22,762,341
-------
* Less than one percent (1%).
(1) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Maytag
Holdings, Inc., is Ken Boyle.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, PA Early
Stage Partners, LP, is Mike Bolton.
(3) Mr. Goodman was the President and Chief Executive Officer of Stitch
through May 14, 2002.
(4) Represents shares issued in exchange for shares of Stitch on May 14, 2002
as part of our acquisition of Stitch. We have agreed to register these
shares for resale under the Act at our cost and expense until May 13,
2005.
EMPLOYEE SEVERANCE COMMON STOCK
Beneficial Ownership~
After Offering
---------------------
Selling Shareholder(1) Common Stock Offered Hereby Number Percent
------------------- --------------------------- ------ ----------
Robert Foehl .... 16,200 0 *
David Borgese ... 25,400 0 *
Christopher Keane 26,500 0 *
Daniel Kearney .. 44,900 0 *
Kenneth May ..... 16,700 0 *
Sean McGraw ..... 8,700 0 *
James Rosemary .. 28,000 0 *
Staci Spitzer ... 19,200 0 *
David Vrencur ... 14,200 0 *
Aaron Watkins ... 12,500 0 *
Doug Wiggins .... 22,300 0 *
--------
TOTAL 234,600
-----------
* less than one percent (1%)
(1) Represents shares issued to our former employees as severence payments in
June 2002 at a value of $.25 per share. We have agreed to register these
shares for a period of 9 months.
KARL MYNYK COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby Number Percent
------------------- -------------- ------ --------
Karl C. Mynyk(1) 125,000 0 *
--------
* less than one percent
(1) The shares were issued to Mr. Mynyk (a former employee of USA) pursuant to
a Settlement Agreement and Release between Mr. Mynyk and the Company. These
shares were valued at $.20 per share. We have agreed to register these
shares for resale for a period of one year.
58
YOMI RODIG COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby(1) Number Percent
------------------- -------------- ------ -------
Yomi Rodig 6,000,000 0 *
----------
(1) Consists of 2,000,000 shares of Common Stock purchased at $.10 per share
and 4,000,000 shares underlying warrants exercisable at $.10 per share.
KAZI MANAGEMENT COMMON STOCK
Beneficial Ownership
After Offering
--------------------
Common Stock
Selling Shareholder Offered Hereby(1) Number Percent
------------------- -------------- ------ -------
Kazi Management VI, Inc. (2) 22,857,145 0 *
----------
(1) Consists of 3,571,429 shares of Common Stock purchased at $.07 per share and
19,285,716 shares underlying warrants. Of these warrants 5,000,000 are
exercisable at $.10 per share and the the balance at $.07 per share.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Kazi Management,
is Zubair Kazi.
ALPHA CAPITAL COMMON STOCK
Beneficial Ownership
After Offering
--------------------
Common Stock
Selling Shareholder Offered Hereby(1) Number Percent
------------------- -------------- ------ -------
Alpha Capital
Aktiengesellschaft (2) 4,500,000 0 *
----------
(1) Consists of 3,000,000 shares of Common Stock and 1,500,000 shares underlying
warrants. The shares were purchased at $.10 per share and 750,000 warrants are
exercisable at $.15 per share and 750,000 warrants are exercisable at the
closing price of our common stock on the seventh business day following the date
of this prospectus.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Alpha Capital,
is Brian Shatz.
LA JOLLA COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby Number Percent
------------------- -------------- ------ -------
La Jolla Cove
Investors, Inc.(1)(2) 9,000,000 15,725,096 8.1%
--------
* less than one percent
(1) Represents shares issuable under warrants.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, La Jolla Cove
Investors, is Travis Huff.
59
2001-B RESTRICTED COMMON STOCK
Common Stock Beneficial Ownership
Selling Shareholder(23) Offered Hereby After Offering
------------------- -------------- --------------------
Number Percent
------ -------
ALEX CONSULTING(1) (12) 100,000 2,921,000 1.5%
KATHLEEN FERLAND CUST
FOR ALEXANDRA ANTOINETTE FERLAND . 134
MICHELLE H & COSTA J ALVANOS 2,334
MICHELLE H ALVANOS 5,000
WAYNE A ANDERSON 16,667
CHARLES W APPLE 30,000
BARRY ARNDT 167
COLEEN AYERS 3,000
DANIEL C AYERS 1,334
JOHN P AYERS 40,000
JOHN R BACHICH 100,000
MICHAEL BACHICH 225,000 950,000 *
VIRGINIA S BALTZELL 3,334
CHARLES M & NANCY P BARCLAY 15,000
KIRSTEN BAZURO(11) 2,000 188,775 *
GUNTER J BEYER(13) 16,667 121,500 *
DAVID C BLACKBURN 50,000
JOSEPH J BOLITSKY 106,667
GARY BOURASSA 6,667
60
E DOUGLAS & CAROLYN BRITTAIN 13,334
VERNON & DELLAVE BRITTAIN 11,667
VINCENT J CALVARESE 6,667
RONALD J CAMMAROTA 6,667
JERROLD CARL & SUSAN E COHEN 50,000
JULIE CARLSON 132,000
GORDON S & MARYLOU C CLAUSEN 10,000
DIANE CLOUTIER 15,000
MARC A COHEN 70,000
HELEN COLOMBO & JIM CROSS 16,667
HELEN COLOMBO & JIM CROSS 6,667
COLUMBIA MARKETING LTD (13) 100,000
GERARD W COONEY 15,000
JOHANNA CRAVEN 4,167
WILLIAM R CROTHERS 5,000
CLIFTON B CURRIN 33,334
WILLIAM K & LINDA S CURTIS 66,667
DAVID S D`ANGELO 43,334
HRUBALA ASSOCIATES, A PARTNERSHIP
DAVID R MOLUMPHY, PARTNER (14) 16,667
SOFIA R DIN 20,000
LEO J DOLAN 13,334
ROBERT F & MELANIE J DRESS 18,334
HOWARD P EFFRON 25,000
KATHLEEN FERLAND CUST
FOR ELLIOT RAYMOND FERLAND 134
SOLOMON ELLNER 13,334
ANTHONY J FANELLI 30,000
KATHLEEN FERLAND 1,667
JOHN S FOSTER 26,667
ROBERT R FREY 5,125
MARGARET R GEDDIS 3,334
RONALD C & BONNIE H GIBSON 13,334
CHARLOTTE GIVEN(2) 30,000 282,000 *
HARRIET & CARY GLICKSTEIN 30,000
JULIUS GOLDEN 10,000
WILLIAM M GOLDSTEIN 20,000
PETER GRAHM 58,334
ROBERT GRAY 30,000
DIAN GRIESEL(2) 46,667 0 *
61
BRUCE H HALE 11,667
BILL HALSTENRUD 15,000
IRA FBO ROBERT A HAMILTON 16,667
DEVIN HANSEN 15,000
NANCY HANSEN 10,000
NANCY HANSEN 13,334
NANCY HANSEN 187,334
CONG. SHARIT HAPLETA (15) 175,000
WILLIAM F HARRITY JR 63,334
GEORGE HARRUM(11) 13,334 81,000 *
ROBERT P HAUPTFUHRER
FAMILY PARTNERSHIP (16) 20,000
JACK M HEALD 11,667
ANDREW B HEBENSTREIT 23,334
ANN HEBENSTREIT 10,000
ADELE H HEPBURN(1) 333,334 1,983,649 1.0%
JANET J HEWES 15,000
AHP HOLDINGS, LP (17) 93,334
MICHELLE R HOLLENSHEAD 4,167
DAVID W HUBBERT 10,000
GORDON F HUDSON 15,000
MARK J HUDSON 15,000
NICHOLAS HUDSON 11,667
CHRISTINE F HUGES 5,834
HULL OVERSEAS, LTD (18) 85,000
STEVE ILLES 100,000 3,131,250 1.6%
STEVE & ELIZABETH ILLES 1,000,000 3,131,250 1.6%
ROBERT B & MARY LOU JACOBY 6,667
TILEEN JACKSON(11) 1,000 5,277 *
PATRICIA E. RUGART CUST. FOR
JACQUELINE RUGART 5,000
WILLIAM ROBERT JOHNSTON 50,000
DONALD R & JOAN F JONES SR 16,667
MICHAEL KATCHER 15,000
THOMAS A KATCHUR 100,000
KAUFMAN & ASSOCIATES (19) 90,000
ROBERT G. PADRICK, TRUSTEE
FBO KELLIE NICOLE PADRICK 16,667
GEORGE H & JUNE Y KILMARX 13,334
HARRIETTE D KLANN 6,667
SHIRLEY K KNERR 15,000
PHILLIP S KROMBOLZ 33,334
JOE LABRUM 167
62
KATE LABRUM 167
SARA LABRUM 167
AARON LEHMANN 13,334
SHELLEY & JAMES LEROUX 20,000
WARREN D LEWIS 11,667
H MATHER & MARGARET W LIPPINCOTT .. 1,667
STEPHEN M LUCE(11) 6,667 111,760 *
DOUGLAS M LURIO(5) 50,000 433,213 *
CORNERSTONE PUBLIC
RELATIONS GROUP INC (20) 3,750
JAMES P MACCAIN 23,334
AIMEE MARCHAND 2,500
MARIEL MARCHAND 2,500
ROBIN H MARCHAND 11,667
KATHLEEN J MASON 153,334
G DIEHL MATEER JR 11,667
MICHAEL JOHN MCGONOUGH C/F
MATTHEW MICHAEL MCDONOUGH 134
CHARLES A MAYER 13,334
THOMAS E MCCARTY(6) 33,334 380,000 *
ROBERT G MCGARRAH(7) 50,000 408,000 *
PETER J MCGUIRE 160,000
JAMES F MERRIMAN 20,000
MICHAEL W MILES 20,000
BARBARA HOWARD MILLER 18,334
HARLEY & BROOK MILLER 13,334
GEORGE W MOFFITT JR 45,000
KENNETH G MOLTA 6,667
ROBERT & ROSEMARY MONTGOMERY 13,334
LOUIS J & KAREN M MUTH 11,667
ELIZABETH L NELSON 50,000
GREGG J NEWHUIS 293,334
JEFFREY M NEWHUIS 53,334
PAUL NORDIN 6,667
GEORGE O`CONNELL 160,000
SUSAN ODELL 23,334
PATRICK O`MALLEY(11) 8,500 35,000 *
ALEX ORLIK(11) 76,916 11,667 *
ERIC PAGH 15,000
MICHAEL A PARKER 13,334
NEIL L PARKER 10,000
DELAWARE CHARTER GUARANTEE & TRUST
FBO BARRY J PATRIZZI IRA . 13,334
DOUGLAS A PERRY 4,167
LARRY R PERRY 4,167
MATTIE A & WILLIAM R PERRY 8,334
RICHARD D PERRY 4,167
HELEN PETLOWANY 3,334
ROY T PIRHALA 6,667
RANDY J POST 3,334
ROBERT H POTTS 11,667
BARBARA L PRESCOTT 2,500
CHARLES W & MARIA O PROCTOR III 1,667
JEANNE S QUIST 13,334
PAUL RAFFERTY 33,334
PAUL J & D JOAN RAFFERTY 30,000
63
ROSAMOND P RANKIN & BYRD M HOWIE .. 3,334
WILLIAM RECKTENWALD 40,000
HARRY RENNER IV 67,500
JOHN B RETTEW III 16,667
GEORGE B RICHARDSON 41,667
MARGIE RIFENBARK(11) 2,000 3,600 *
PATRICIA E. RUGART C/F
ROBERT TURNER RUGART 5,000
GARDINER ROGERS 10,000
ROBERT ROGGIO 6,667
JOHN E HAMILTON ROTH IRA WITH
WACHOVIA SECURITIES 16,667
PETER S RUBEN 30,000
KARL F RUGART 15,000
JOHN S RUPP 12,500
CHARLES SCHWAB & CO FBO PETER
A SANDS IRA ACCT 7780-9057 13,334
WILLIAM F SCHOENHUT JR 13,334
RICHARD SCHONWALD 250,000 1,842,875 *
STEVE SCHEIDERMAN (11) 1,150 3,550 *
MARY L SCRANTON 11,667
BEN SIDES 3,334
JOSEPH SINGER 13,334
LESLIE & ETHEL SINGER 11,667
ROBERT G & ROCIO SINGER 13,334
RICHARD O SMITH 10,000
STEVEN W & MARIE E SMITH 15,000
STEVEN W SMITH SSB AS IRA CUSTODIAN 30,000
DANIEL E SPEALMAN 46,667
BB SECURITIES CO FBO
DANIEL E SPEALMAN IRA 29,167
MICHAEL & ELLEN STEIR 28,334
HOMER N & NATHALIE W STEWART 10,000
PRISCILLA STITT 2,000
EDWARD B STOKES 10,000
MARCUS B & EMIKO M STRINGFELLOW 40,000
VIVIAN K STROUD(11) 6,667 189,127 *
CAROLYN S & CLARK D STULL JR JTWROS 15,834
MARY TOBIN(11) 1,667 103,550 *
MICHAEL TODD(11) 1,667 8,600
JEAN TURNER(11) 3,334 66,000 *
WILLIAM L VAN ALEN JR(8) 13,334 260,671 *
VIRTUAL CONCEPTS CORP(9) (21) 120,000 300,000 *
LOIS M WAGNER 7,500
ROBERT E WAGNER 27,857
C ANTHONY WAINWRIGHT 15,000
JOHN WECKERLING 26,667
HENRY W WESSELLS III 1,667
DELTA WESTERN COMPANY (22) 150,000
ARTHUR L WHEELER 33,334
ARTHUR A WIENER 2,017
J EDWARD WILLARD 26,667
WILLIAM W SELLERS TR UA 11/20/00
WILLIAM W SELLERS REV
TRUST(10) 26,667 885,441 *
MARGARET S WILLIAMS 34,334
ROBERT H WILLIAMS DDS ASSOC
PROFIT SHARING PLAN 50,000
DONALD J ZELENKA 90,000
RUTH ZWEIGBAUM 7,084
---------
TOTAL 7,395,440
=========
---------~
64
* Less than one percent (1%).
(1) Mrs. Hepburn is the Director of Public Relations of USA.
(2) Dian Griesel is an officer with an investment relations firm doing work
for USA
(3) I.W. Miller Group was our public relations firm.
(4) Mr. Jensen is the Chairman and CEO of USA.
(5) Mr. Lurio is a Director and his law firm, Lurio & Associates, P.C., is
general counsel to USA.
(6) Mr. McCarty is a consultant to USA.
(7) Mr. McGarrah is a consultant to USA.
(8) Mr. Van Allen is a Director of USA.
(9) Acts as a consultant to USA.
(10) Mr. Sellers is a Director of USA.
(11) Employee of USA.
(12) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Alex Consulting,
is Paul Winkle.
(13) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Columbia
Marketing Ltd., is Conrad Meyer.
(14) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Hrubala
Associates, is David R. Molumphy.
(15) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Cong. Sharith
Hapleta, is Leiby Solomon.
(16) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity,Robert P.
Hauptfuhrer Family Partnership, is Robert Hauptfuhrer.
(17) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, is AHP Holdings,
LP, is Alex H. Petro.
(18) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Hull Overseas,
Ltd., is Mitch Hull.
(19) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Kaufman &
Associates, is Criag Kauffman.
(20) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Cornerstone
Public Relations Group Inc., is M. Darlene Herbert Felt.
(21) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Virtual Concepts
Corp., is Shelly Kraft.
(22) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Delta Western
Company, is George W. Moffitt.
(23) Represents our shares purchased by the selling shareholders in 2001 at $.60
per share. We have agreed to register these shares for resale under the Act at
our cost and expense through September 2003.
65
2001 - C RESTRICTED COMMON STOCK
Common Stock Beneficial Ownership~
Selling Shareholder(28) Offered Hereby After Offering
------------------- -------------- --------------------
Number Percent
------ -------
ALEX CONSULTING (14)(17) 350,000 2,671,000 1.3%
JACKSON L ANDERSON 12,000
CHARLES W APPLE 20,000
KIRSTEN BAZURO (10) 10,000 180,775 *
REBA A BEESON 10,000
MARION DOUGLAS BELIN
& TEDDIE EARLINE BELIN 40,000
GUNTER J BEYER (16) 10,000 128,167 *
KATHLYNE K BIRDSALL 5,000
RICHARD & MARY BIRTZ 12,000
DAVID J BORGESE(15) 1,000 0 *
EDWIN R BOYNTON (1) 50,000 277,887 *
NEAL BOZENTKA 40,000
WILLIAM P BURKS MD 5,000
PAUL J BRODERICK (10) 1,000 0 *
AUGUST B CASTLE JR 62,716
ROBERT J CLARKE 20,000
JOHANNA CRAVEN 6,000
HELENA CRECRAFT 10,000
CLIFTON B CURRIN 6,000
BENJAMIN H DEACON 10,000
DAVID DE MEDIO (10) 30,000 234,349 *
DONALD M & DIANNE M DENLINGER 12,000
LOUIS E & ROSE M DI RENZO 10,000
JAMES W EFFRON 14,000
SOLOMON ELLNER 30,000
ANTHONY J FANELLI 4,000
FIELDMAN, HAY & ULLMAN (11)(18) 50,000 1,677,700 *
FIN MAP CORPORATION (19) 50,000
66
JOHN S FOSTER MD 60,000
ROBERT R FREY 9,900
GRANT GALLOWAY 20,000
ELLEN GIMBEL 6,000
RICHARD GONDA 279,000
HAROLD N GRAY 4,000
JAMES P & JOYCE M GREAVES 20,000
ROBERT HAMILTON(10) 1,000 107,976 *
KENNETH R HARRIS 4,800
GEORGE HARRUM (10) 1,000 93,333 *
ANDREW B HEBENSTREIT 60,000
CYNTHIA LOCKHART HEBERTON 2,000
MAUREEN E HENDRON 8,334
ADELE H HEPBURN (2) 102,000 2,214,983 1.1%
AUSTIN HEPBURN (2) 10,000 4,513,788 2.3%
STEPHEN P HERBERT (3) 300,000 186,050 *
ELWOOD E HERBERT 10,000
BJ HOLMES 5,000
ROBERT B & MARY LOU JACOBY 12,000
TILEEN JACKSON (10) 1,000 5,277 *
JOAN S. JAY 20,000
GEORGE R JENSEN JR (4) 320,000 439,000 *
THOMAS A KATCHUR 20,000
KAUFMANN & ASSOCIATES (20) 20,000
HARRIETTE D KLANN 10,000
HAVEN BROCK KOLLS (5) 200,000 104,725 *
BRIAN KRUG (10) 1,000 0 *
LOIS A LANDIS 4,000
MICHAEL LAWLOR (6) 130,000 277,050 *
CECIL LEDESMA (10) 40,000 110,500 *
SHELLEY & JAMES LEROUX III 12,000
STEPHEN LUCE (10) 10,000 108,427 *
LELAND P MAXWELL (7) 130,000 147,050 *
LILY L MCCARTNEY 8,000
THOMAS E MCCARTY (8) 50,000 363,333 *
ROBERT G MCGARRAH 100,000
HARLEY & BROOK MILLER 5,000
MULL & PAIGE ASSOCIATES LLC (21) 100,000
ELIZABETH L NELSON 20,000
SUSAN ODELL 40,000
PATRICK O`MALLEY (10) 1,000
ALEX ORLICK (10) 150,000 73,583 *
ROBERT G PADRICK 20,000
67
ROBERT G. PADRICK TRUSTEE FOR
ROBERT G. PADRICK
P/S/P AND TRUST 20,000
ERIC PAGH 20,000
RICHARD G & LAURA J PARKER 8,000
BARRY PATRIZZI (10) 10,000 26,834 *
ROY T PIRHALA 6,634
ROGER RADPOUR 500
MARGIE RIFENBARK (10) 1,000 4,600 *
JOHN S RUPP 2,000
STEPHEN SCHEIDERMAN (10) 6,000 0 *
RICHARD S SCHONWALD 60,000
AMY SEYMOUR (10) 1,000 90,550 *
SHAMROCK HOLDING (22) 100,000
THOMAS SHANNON (10) 30,000 50,440 *
RAYMOND K SHOTWELL 2,000
GEORGE H SORRELL 2,000
DANIEL E SPEALMAN 18,000
ROBERT SPEARS 100,000
HOMER N & NATHALIE W STEWART 6,000
PRISCILLA STITT 2,000
STRATEGIC INVESTMENT MANAGEMENT SA (23)400,000
VIVIAN STROUD (10) 1,000 194,794 *
CLARK D & CAROLYN S STULL JR JTWROS 4,800
TECHNOLOGY PARTNERS (HOLDINGS)LLC (24)(27) 120,000
ALFRED HUNTER & SUSAN MARY THOMPSON 3,000
ANDREW ANDERSON & MARY LYNN THOMPSON 2,000
DANIEL G THOMPSON 4,000
ROSALIE H THOMPSON 20,000
SAMUEL REEVES THOMPSON 4,000
TREETOP INVESTMENTS (25) 100,000
MARY TOBIN (10) 10,000 95,217 *
MICHAEL TODD (10) 2,500 7,767 *
JAMES L VAN ALEN 6,000 0 *
VIRTUAL CONCEPTS (13)(26) 135,000 240,000 *
WILLIAM W SELLERS
TR UA 11/20/00 WILLIAM
W SELLERS REV TRUST (9) 100,000 812,108 *
MARGARET S WILLIAMS 18,000
ROBERT H WILLIAMS DDS
ASSOC PROFIT SHARING PLAN 24,000
DEBORAH WITTE 110,000
FRANCIS WOLFE, JR 1,000
MIKE WUSINICH 20,000
RUTH ZWEIGBAUM 6,000
---------
TOTAL 4,069,184
=========
--------------
* Less than one percent (1%).
(1) Mr. Boynton is a Director of USA.
(2) Adele Hepburn and Austin Hepburn are husband and wife. Mrs. Hepburn is the
Director of Public Relations of USA.
(3) Mr. Herbert is a Director, President and Chief Operating Officer of USA.
(4) Mr. Jensen is Chairman of the Board and Chief Executive Officer of USA.
(5) Mr. Kolls is Senior Vice President of Research and Development of USA.
(6) Mr. Lawlor is the Vice President of Marketing and Sales of USA.
(7) Mr. Maxwell is the Treasurer and Chief Financial Officer of USA.
(8) Mr. McCarty is an employee of USA.
(9) Mr. Sellers is a Director of USA.
(10) Employee of USA.
68
(11) Fieldman, Hay & Ullman represented USA in connection with pending
litigation.
(12) Mr. Van Alen is a Director of USA.
(13) Virtual Concepts is a consultant to USA.
(14) Alex Consulting is a consultant to USA.
(15) Former employee of USA.
(16) Consultant to USA.
(17) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Alex Consulting,
is Paul Winkle.
(18) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Fieldman, Hay Y
Ullman, is John Hay.
(19) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Fin Map, is John
Mull.
(20) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Kaufman &
Associates, is Craig Kaufman.
(21) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Mull & Paige
Associates LLC, is John Mull.
(22) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Shamrock
Holding, is Shelly Kraft.
(23) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Strategic
Investment Management SA, is Marilyn Rosevelt.
(24) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Technology
Partners (Holdings) LLC, is Porter Bibb.
(25) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Treetop
Investments, is Mike Iorlano.
(26) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Virtual
Concepts, is Shelly Kraft.
(27) Technology Partners is the investment banker of USA.
(28) Represents shares purchased from us by the selling shareholders in 2001 for
$.50 per share. We have agreed to register these shares for resale under the Act
at our cost and expense until October 2003.
69
2004 SENIOR NOTE COMMON STOCK
Beneficial Ownership~
After Offering
---------------------
Selling Shareholder Common Stock Offered Hereby(1) Number Percent
------------------- --------------------------- ------ -------
AHP HOLDINGS (9) 116,668
Alvanos, Michelle & Costa 15,000
Anderson, Jackson L 15,000
Anderson, Wayne a 41,668
Apple, Charles W 112,500
Bazuro, Kirsten and Robert(8) 12,500 184,525 *
Barclay, Charles & Nancy 50,000
Birdsall, Kathlyne K 6,250
Bjorklund, Alexandra O 75,000
Blackburn, David C 125,000
Bolitsky, Joseph J 133,334
Boyar, Lea 25,000
Boynton, Edwin R(2) 62,500 296,637 *
Breslin, Billie 50,000
Brittain Family Trust (10) 33,336
Burks, William P 31,250
Calvarese, Vincent J 12,500
Carl, Jerrold & Susan Cohen 125,000
Carlson, Julie 330,000
Castle Jr, August B 78,396
Charrington III, Arthur M.R. 50,000
Charrington, Ardis B 50,000
Chiordi, Michael J 50,000
Ciesielski, Judy a 50,000
Clark Jr, Gerald E 35,000
Clarke, Robert J 45,000
Clausen, Gordon & Marylou 12,500
Cohen, Marc A 87,500
Cong Sharit Hapleta (11) 250,000
Cornerstone Public Relations Group (12) 4,688
Craven, Johanna 17,918
70
Cross, Jim & Helen Columbo 16,668
Crothers, William R 6,250
Crow, Lorraine 5,000
Currin, Clifton B 49,168
Curtis, William & Linda 100,000
D`Angelo, David S 54,168
Deacon, Benjamin 12,500
Delta Western Company (13) 187,500
Demaris, Sheri-lynn 175,500
DeMedio, David (8) 37,500 245,599 *
Denlinger, Donald & Dianne 60,000
Diligent Finance Co Ltd(6) (14) 1,600,000 1,578,000 *
Direnzo, Louis & Rose 12,500
Dolan, Leo J 40,000
Dress, Robert & Melanie 36,668
Effron, Howard 50,000
Effron, James 17,500
Elliott, Bently 50,000
Evanko, Dr. Mark A 5,000
Fanelli, Anthony 85,000
Foster, John S 141,668
Frey, Robert R 18,780
Fulmer, Samantha Harris 5,000
Fusaro, Anthony A 100,000
Galvin, Dorothy 5,000
Geddis, Margaret R 8,336
Gibson, Ronald & Bonnie 33,336
Giddens, Robert G 100,000
Gillespie, Gale S 25,000
Glickstein, Harriet & Cary 75,000
Glockner, Frederick & Joan 5,000
Golden, Julius 25,000
Goldstein, William M 50,000
Greaves, James & Joyce 25,000
Groff, Larry K & Sheryl L 15,000
Hamilton, IRA FBO Robert A. (8) 21,000 93,226 *
Hamilton, Robert A. (8) 10,500 93,226 *
Hansen, Nancy Huston 310,000
Harris Jr, Burt I 800,000
Harris, Burt I 800,000
Harris, Kenneth R 6,000
Harrity Jr, William F 158,336
Hauptfuhrer Family Partner (15) 50,000
Heald, Jack M 29,168
Hebenstreit, Andrew B 183,336
Hebenstreit, Ann 75,000
Hebenstreit, Lisa 40,000
Hebenstreit, Sam 35,000
71
Hebenstreit, Timothy B 55,000
Hebenstreit, Todd 40,000
Hendron, Maureen E 40,833
Hepburn, Adele H(3) 544,168 2,044,899 1.0%
Hepburn, Austin B(3) 8,496 4,349,456 2.2%
Hollenshead, Michelle 10,418
Holt, Alton 260,000
Hrubala Assoc, a Partnership (16) 20,834
Hubbert, David W 12,500
Hudson, Gordon F 25,000
Hudson, Mark J 40,000
Hudson, Nicholas 18,000
Hughes, Christine F 14,586
Illes, Steve 1,000,000
Illes, Steve 375,000
J.M. Hull Associates LP (17) 106,500
Jackson, Nata M 200,000
Jacoby, Robert & Mary Lou 63,336
Johnston, William Robert 100,000
Jones, Charles T 25,000
Jones, Donald & Joan 20,836
Katchur, Michael 37,500
Katchur, Thomas A 275,000
Katchur, Thomas John 54,000
Kilmarx, George & June 33,336
Klann Trust, Harriette D 16,668
Klann, Harriette D 25,000
Knerr, Shirley K 45,000
Kobus, Gregory & Alice 50,000
Landis, Lois 5,000
Lewis, Warren D 29,168
Lippincott Jr, H Mather & Margaret 50,000
Lockhart-heberton, Cynthia 2,500
Lopez, Anthony & Barbara 50,000
Luce, Stephen M (8) 16,668 110,093 *
Maccain, James P 58,336
Madan, Lewis F 10,000
Marchand, Aimee 6,500
Marchand, Mariel 6,500
Marchand, Robin 27,168
Martin, C Leonard 100,000
Mason, Kathleen J 383,336
Mayer, Charles 20,000
McCartney, Lily 10,000
McGonigle, John & Rosemary 5,000
McGonigle, Mary C 5,000
McGuire, Peter J 400,000
Merriman, James F 50,000
Migliaccio, Al for Ashlee 25,000
Miller, Eileen & Lawrence 20,000
72
Miller, Harley & Brook 22,918
Millikin, George & Caroline 150,000
Moffitt Jr, George W 56,250
Montgomery, Ernest E 50,000
Montgomery, Robert & Rosemary 33,336
Moyer, F Stanton 125,000
Murray, Barbara J 50,000
Nelson, Elizabeth L 87,500
Newhuis, Gregg J 75,000
Newhuis, Jeffrey M 35,000
Nolan, Patrick 100,000
Nordin, Paul 16,668
O`Connell, George 200,000
Odell, Susan 108,336
Orlik, Alex (8) 45,626 68,270 *
Pagh, Eric 62,500
Parker, Michael A 16,668
Parker, Neil L 12,500
Parker, Richard & Laura 40,000
Perry, Douglas 10,418
Perry, Larry R 10,418
Perry, Mattie & William 50,000
Perry, Richard 10,418
Pirhala, Roy T 33,252
Potts, Robert H 50,000
Prescott, Barbara L 6,250
Proctor, Charles & Maria 2,084
Rafferty, Paul & Joan 158,336
Recktenwald, William 100,000
Reisner, William & Frances 60,000
Renner IV, Harry 168,750
Rettew III, John B 41,668
Richardson, George & Sharon 52,084
Rogers, Gardiner 15,000
Roper, Lisa & Lee 75,000
Roper, Marie G 75,000
Rugart, Karl F 37,500
Rupp, John S 33,750
Scammahorn, Keith & Lynne 50,000
Schoenhut Jr, William F 33,336
Scholl Profit Sharing Plan, Db 50,000
Scholl, Margaret J 50,000
Schonwald, Richard S 312,000
Scranton, Mary L 29,168
Sellers Trust, William W (7) 158,334 832,941 *
Shotwell, Raymond K 2,500
Shupe, Johnnye F 5,000
Singh, Krishna K 150,000
Smith, Richard 600,000
Spealman Ira, Daniel 36,458
Spealman, Daniel E 194,998
73
Steir, Michael & Ellen 37,500
Stewart, Homer & Nathalie 32,500
Stitt, Priscilla A 7,500
Stokes, Edward B 50,000
Stringfellow, Marcus & Emiko 50,000
Stull, Clark D 3,500
Szychoski, George E 500
Szychoski, Michael W 1,250
Szymborski, Constantine T 50,000
Technology Partners(5) (18) 125,000
Technology Partners(5) (18) 1,800,490
Thompson, Alfred & Susan 3,750
Thompson, Andrew & Marylynn 2,500
Torres, Guillermo M 50,000
Unanue, Curtis & Maria 150,000
Van Alen Jr, William L(4) 16,670 265,670 *
Wagner, Robert E 69,642
Weaver, David 11,000
Weaver, Kevin & Alicia 150,000
Weaver, Michael L 5,000
Weaver, Wesley R 25,000
Wessells III, Henry W 4,168
Wheeler, Arthur L 2,305,000
Willard, J Edward 241,668
Williams Dds Profit Sharing 295,000
Williams, Margaret S 179,000
Yoshimoto, Craig 50,000
Yutzy, John a & Lucinda K 40,000
Zelenka, Donald J 112,500
Zweigbaum, Ruth 25,210
Total 23,262,506
-----------
* Less than one percent (1%)
(1) The amount listed for each selling shareholder reflects the shares into
which the selling shareholder`s senior note due December 31, 2004 would be
convertible at the rate of $.20 per share. As of the date of this prospectus,
none of these shares have been issued upon conversion of the Senior Notes. We
have agreed to register these shares for
resale under the Act at our cost and expense until June 2004.
(2) Mr. Boynton is a Director of USA.
(3) Ms. Hepburn is Director of Public Relations for USA.Mr. Hepburn is the
spouse of Adele Hepburn.
(4) Mr. Van Alen is a Director of USA.
(5) Technology Partners is the investment banker for USA.
(6) Consultant to USA.
(7) Director of USA.
74
(8) Current employee of USA.
(9) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, AHP Holdings, is
Alex H. Petro.
(10) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Brittain Family
Trust, is E. Douglas Brittain.
(11) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Cong. Shearith
Hapleta, is Leiby Solomon.
(12) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Cornerstone
Public Relations Group, is M. Darlene Herbert Felt.
(13) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Delta Western
Company, is George W. Moffitt.
(14) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Diligent Finance
Co. Ltd., is Rai Hamilton.
(15) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Hauptfuhrer
Family Partnership, is Robert Hauptfuhrer.
(16) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Hrubala Assoc, a
Partnership, is David R. Molumphy.
(17) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, J.M. Hull
Associates LP, is Mitch Hull.
(18) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Technology
Partners, is Porter Bibb.
75
2005 SENIOR NOTE COMMON STOCK
Beneficial Ownership
After Offering
---------------------
Selling Shareholder(32) Common Stock Offered Hereby Number Percent
----------------------- --------------------------- ------ ----------
Aanestad, Donald T. 140,000
Alex Consulting(8) (14) 350,000 2,671,000 1.3%
Alimachandani, Vijay 210,000
Alvarez, Delia P. 35,000
Anderson, Wayne A. 35,000
Apple, Charles W 70,000
Apple, Susan Schram 70,000
Bachich, John 350,000
Bellavia, Charles F. 70,000
Beyer, Gunter(9) 70,000 68,167 *
Blackburn, David C. 105,000
Blackburn, Donald F. 210,000
Bolitsky, Joseph 70,000
Bransville Investment Ltd. (15) 140,000
Bray, David G. 14,000
Brill Securities (16) 210,000
Brittain, Douglas & Carolyn 140,000
Brodine, Gordon L. 140,000
Budinetz, Michael J. 99,750
Burks, William P. 70,000
Carlson, Julie 70,000
Cape MacKinnon, Inc. (17) 350,000
Castle Jr, August B. 70,000
Clarke, Robert J. 910,000
Coffey, Roger D. 70,000
Cong Shearith Hapleta (18) 385,000
Craven, Johanna 8,750
Crow, Dudley R. 70,000
Currin, Clifton B. 140,000
Curtis, William K. 99,750
D`Angelo, David 210,000
DeMaris, Sheri Lynn 126,000
Diligent Finance Co. Ltd.(10)(19) 700,000 1,678,000 *
Din, Anees T 189,000
Elliot, Ben 210,000
Ellner, Solomon 350,000
Ellshay, LLC (20) 140,000
Fanelli, Anthony J. 70,000
Firestone, Jeffrey 280,000
Forigo, Daniele 250,005
Fox, Helen K. 70,000
Fusaro, Anthony A. 70,000
Geddis, Margaret R 17,500
GFG Consulting (21) 420,000
Giddens, Robert G. 311,967
Given, Charlotte (11) 140,000 172,000 *
Deacon Jr. Benjamin H 35,000
Finn Staff 140,000
76
Herbert, Julie(7) 350,000 1,288,720 *
Jones, Robert 210,000
Glickstein, Harriet 70,000
Glicksman, Rachel 336,000
Goldstein, William M. 70,000
Gregory, Alan V. 70,000
Hainey, Bob 350,000
Haldeman, Edward 140,000
Haldeman, Pauline E. 140,000
Hall, Robert & Virginia 35,000
Harrity Jr, William 70,000
Harris, Ken 26,857
Hauptfuhrer Family Partnership (22) 175,000
Hauptfuhrer, Barbara D. 70,000
Heald, Cynthia & Jack 70,000
Hebenstreit, Andrew 350,000
Hendron, Maureen 70,000
Hepburn, Adele (1) 700,000 1,616,983 *
Hepburn, Austin B.(1) 70,000 3,855,788 1.9%
Herbert, Stephen B.(7) 350,000 136,050 *
Hewson, Thomas A. 140,000
Hrubala Associates, a Partnership (23) 70,000
Hudson, Gordon F. 35,000
Hudson, Mark J. 17,500
Hudson, Nicholas C. 17,500
Hughes, Christine F. 35,000
Ignite Capital (24) 350,000
Illes, Steve 175,000
Internet PR Group (25) 70,000
Jalmarson, Graig H. 42,000
Jenkins, Wendy 140,000
Jensen, Burton(2) 74,328 1,088,544 *
Jensen, David(2) 74,328 339,000 *
Jensen, George(2) 420,000 1,088,544 *
Jensen, Julie(2) 280,000 1,088,544 *
Jones Sr, Donald & Joan 9,332
Katchur, Thomas A. 490,000
Katchur, Thomas John 70,000
Keffer, John & Raelene 70,000
Knode, Raplh H. 140,000
Konsmo, Oystein 87,500
Law, Jeannine P. 70,000
Leboutillier, Sherril F 70,000
Lee, Steven 17,500
Lehmann, Aaron 189,000
Leroux, Shelley 70,000
Lewis, Warren D. 70,000
Lexington Venutres (26) 420,000
Lippincott Jr., H. Mather 35,000
Lizzul, Paul & Dawn-Marie 70,000
Lockhart, Loretta 40,005
Lozowski, Robert 14,000
Luppino, Frances 70,000
Lurio, Douglas(3) 105,000 152,213 *
Maloney, Virginia Marshall 7,000
Mason, Kathleen 140,000
Max Communications (27) 420,000
McCabe, Barry N. 70,000
McCormick, John F. 175,000
Knerr, Shirley K 70,000
77
Potts, Robert H 70,000
Mcgarrah, Robert G(12) 210,000 248,000 *
McGuire, Peter J. 140,000
Merriman, James 210,000
Miller, Harley & Brook 24,500
Moffitt Jr, George W. 70,000
Montgomery, Robert & Rosemary 70,000
Mosier, James 140,000
Nash, Gary 14,000
Neff, Ronnie 70,000
Neil, James 140,000
Nelson, Elizabeth L. 140,000
Nemeth, Robert F. 140,000
Newhuis, Gregg J. 1,295,000
Newhuis, Jeffrey 44,345
Nolan, Patrick 24,325
Oakland, Gary 105,000
OConnell, George 280,000
ONeill, Brian J. 105,000
Padrick, Robert 280,000
Panorama Partners (28) 21,000
Parker, Neil L. 17,500
Parker, Richard & Laura 175,000
Pellegrino, Joseph 1,400,000
Penjuke, William & Carol 70,000
Pett, Robert A. 700,000
Pirhala, Roy T. 146,003
Ransome III, Ernest L. 70,000
Recktenwald, William 140,000
Reichl, Thomas C. 21,000
Reisner, Greg A. 70,000
Reisner, William & Frances 70,000
Renner IV, Harry 70,000
Rettew III, John B. 35,000
Richardson, George B. 72,917
Roberts, Noma Ann 35,000
Roper, Lee & Lisa 70,000
Rosenthal, Jerry 140,000
Ruben, Peter B. 700,000
Rugart, Karl F. 35,000
Rupp, John S. 70,000
Schoenhut III, William F. 70,000
Schoenhut Jr., William F. 210,000
Schonwald, Richard S. 490,000
Schwartz, Stephen 175,000
Scifers, Vicki S. 70,000
Sellers, William W. (4) 280,000 632,108 *
Shotwell, Raymond K. 35,000
Shute, Harry D. 35,000
Singer, Joseph 7,000
Padrick, Trustee, Robert G.
Padrick P/S/P and Trust, Robert G 140,000
Padrick, Trustee FBO Kellie Nicle
Padrick, Robert G 70,000
78
Smitley, Kathy 35,000
Snyder, Melvin G. 70,000
Stanglein, Terry W. 252,000
Steir, Michael & Ellen 35,000
Stern, Shai L.(13) 175,000 41,250 *
Stevens, Gertrude 175,000
Stewart, Homer & Nathalie 15,400
Svedas, William 7,000
Tauber, Barbara Ann 7,000
Technology Partners(5)(29) 350,000 1,878,157 *
Tequesta Capital Corp. (30) 99,995
Thompson, Alfred & Susan 14,000
Thoroughgood, William E 17,500
Torres, Guillermo 70,000
Trinity Associates (31) 70,000
Turesky, Stephen S. 35,000
Turner, James 280,000
Van Alen Jr, William L.(6) 140,000 134,005 *
Vodantis, John S. & Hope J. 35,000
Wagner, Robert E. 70,000
Weaver, David E. 21,000
Weaver, Dwane M. 70,000
Weaver, Marlene 700,000
Weaver, Wesley R. 70,000
Wiener, Arthur 37,403
Wiener, Arthur & Ruth 80,850
Wiener, Bernard 35,000
Wilson, Kenneth B. 35,000
Winkle, Paul J. (8) 120,001 25,715 *
Wolfe, Claudine W. 21,000
Wright, C. Edwin & Janet Lyn 35,000
Wright, John D. 35,000
Zelenka, Donald J. 140,000
Zirbes, Joseph 35,000
Zweigbaum, Ruth 17,500
______________
Total 29,988,062
79
________
* Less than one percent (1%)
(1) Mr. Hepburn is the spouse of Adele Hepburn, Director of Public Relations of
USA.
(2) George R. Jensen, Jr., is the Chairman of the Board and Cheif Executive
Officer of USA.
(3) Mr. Lurio is a Director of USA and President of Lurio & Associates, P.C.,
general counsel to USA.
(4) Mr. Sellers is a Director of USA.
(5) Technology Partners is the investment banker of USA.
(6) Mr. Van Alen is a Director of USA.
(7) Mr. Herbert is Director, President and Chief Operating Officer of
USA. Julie Herbert is his spouse.
(8) Mr. Winkle is president of Alex Consulting, a consultant to USA.
(9) Mr. Beyer is our consultant.
(10) Diligent Finance is our consultant.
(11) Charlotte Givens is our consultant.
(12) Robert McGarrah is our consultant.
(13) Mr. Stern is our consultant.
(14) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Alex Consulting,
is Paul Winkle.
(15) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Bransville
Investment Ltd., is Craig Hjalmarson.
(16) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Brill
Securities, is Larry Berk.
(17) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Cape MacKinnon,
Inc., is Steve Frye.
(18) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Cong. Shearith
Hapleta is Leiby Solomon.
(19) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Diligent Finance
Co. Ltd., is Rai Hamilton.
(20) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Ellshay, LLC.,
is Mark Erlich.
(21) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, GFG Consulting,
is Grant Galloway.
(22) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Hauptfuhrer
Family Partnership, is Robert Hauptfuhrer.
(23) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Hrubala
Associate, a Partnership, is David R. Molumphy.
(24) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Ignite Capital,
is Richard Gonda.
(25) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Internet PR
Group, is Roland Perry.
(26) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Lexington
Ventures, is Larry Gordon.
(27) The natural person who exercises sole and/or shared voting or dispositive
80
powers with respect to the shares held of record by the entity, Max
Communications, is Richard Molinsky.
(28) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Panorama
Partners, is Aaron Lehmann.
(29) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Technology
Partners, is Porter Bibb.
(30) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Tequesta Capital
Corp., is Gary F. Lobrozzi.
(31) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Trinity
Associates, is Michael K. Stern.
(32) The amount listed for each selling shareholder reflects the shares into
which the selling shareholder`s senior note due December 31, 2005 would be
convertible at $.20 per share as well as shares issued at the time of issuance
of senior notes. For each $10,000 principal amount of senior note purchased, the
holder also received 20,000 of our shares. As of the date hereof, 1,264,465
shares have been issued to the senior noteholders in exchange for conversion of
their senior notes at $.20 per share, 20,117,581 shares are reserved for future
conversions of the senior notes and 8,606,016 shares were issued to the holders
of the senior notes at the time of the issuance of the senior notes. We have
agreed to register these shares for resale under the Act at our cost and expense
until October 2004.
81
1998-B COMMON STOCK PURCHASE WARRANTS
Common Stock Offered Beneficial Ownership
Selling Shareholder(3) Hereby After Offering
-------------------- -------------------- --------------------
Number Percent
------- -------
Barclay, Charles and Nancy 5,000
Bird, Benjamin Lee 1,250
Bjorkland, Trustee, Alexandra O 5,000
Bolitsky, Joseph J 20,000
Bourassa, Kim 10,000
Burks, William P 2,500
Currin, Clifton B 1,250
Delta Western Company 5,000
Geddis, Margaret R 1,250
Hepburn, Adele H 2,500 4,623,288(1) 2.4%
Jones, Robert 2,500
Klann, Hariette D 2,500
Krook, Nancy 15,000
Moffit, Richard W 5,000
82
Roberts, Noma Ann 2,500
Rubin, Peter 2,500
Selders, Thomas A 2,500
Seltzer, Helen E 250
Sullivan, Robert D 2,500
Young, Frances 50,000 1,775,000(2) *
--------
Total 139,000
--------
---------------
(1) Adele Hepburn is the Director of Public Relations of USA.
(2) Former employee of USA.
(3) Represents 134,000 shares issued upon exercise of our 1998-B Common Stock
Purchase Warrants at $.10 per share and 5,000 shares underlying unexercised
warrants.
1999-B COMMON STOCK PURCHASE WARRANTS
Common Beneficial Ownership
Selling Shareholder(23) Stock Offered Hereby After Offering~
------------------------ -------------------------- --------------------
Number Percent
------ -------
ADAMSON, BROOKE ANN 3,800
ALEX CONSULTING, INC. (1)(14) 30,000 2,991,000 1.5%
ALPERT, ALAN 5,000
ANDERSON, JACKSON L 15,000
ANDERSON, WAYNE 10,000
ARNDT, BARRY 1,000
AYERS, JOHN P 10,000
BEARD, ALEXANDER 500
BELIN, MARION & TEDDIE 20,000
BESCH, NANCY & EARL 5,000
BEYER, GUNTER 2,500
BOLITSKY, JOSEPH 20,000
BOYNTON, EDWIN (2) 20,000 307,887 *
BOYNTON, JAMES R 10,000
BURKS, WILLIAM P 2,500
CALVARESE, JOANNE 10,000
CALVARESE, VINCENT 10,000
CARL, JERROLD & SUSAN COHEN 50,000
CASTLE JR, AUGUST 30,000
CASTOR GROUP LTD (15) 100,000
CATINO, JANET K 5,000
83
CHISTOLINI, JOHN 10,000
CIESIELSKI, JUDY ANN 10,000
COHEN, MARC 10,000
COSTELLO, MAUREEN 10,000
CURRIN, CLIFTON 5,000
CURTIS, A KENNETH & WILLIAM K 20,000
84
CURTIS, WILLIAM K & LINDA S 30,000
DAILEY, JAMES 10,000
D`ANGELO, DAVID 10,000
DEMEDIO, DAVID (3) 3,000 267,349 *
DEMEDIO, MARTHA 1,000
DOLAN, LEO 5,000
EASON, JEAN 2,000
FIELDMAN, HAY & ULLMAN (4) (16) 225,000 1,502,000 *
FRYE, WAYNE 1,250
GEDDIS, MARGARET 2,500
GIDDENS, ROBERT G 10,000
GIDEON TRADING LTD (17) 275,000
GLICKSTEIN, HARRIET & CARY 10,000
GLOMB, CHARLES F 5,000
GREEN, JOHN R 5,000
GRETH, CHARLES & RONNIE NEFF 5,000
HAMILTON FBO IRA, ROBERT (5) 20,000 128,976 *
HAMILTON, JAMES 5,000
HANSCOM, JANE 1,000
HANSEN, NANCY 15,000
HARGETT, JUDY & JOHN 2,500
HARRIS IRA, BETTY 17,500
HARRIS, JASON BRADLEY 20,000
HARRITY, VIRGINIA 5,000
HARRITY, WILLIAM 10,000
HAUPTFUHRER FAMILY PARTNER (18) 5,000
HAUPTFUHRER, BARBARA 10,000
HAVENS, ANDREA 5,000
HEALD, JACK & CYNTHIA 10,000
HEBENSTREIT, ANDREW 10,000
HEPBURN, AUSTIN B (6) 5,000 4,620,788 2.4%
HOLLAWAY, STEVEN 10,000
HOLMWOOD, JAMES 20,000
HORGAN, THOMAS & LISA 10,000
HRUBALA ASSOC. A PARTNERSHIP (19) 10,000
HUGHES, CHRISTINE 2,500
HYMAN, MICHAEL 5,000
IW MILLER GROUP (7)(20) 100,000 468,750 *
JACOBY, ROBERT & MARY LOU 10,000
JOHNSTON, WILLIAM ROBERT 10,000
JONES SR, DONALD & JOAN 5,000
JONES, DONALD R 2,500
JOSHI, RICK 8,400
KELLEHER, CHARLES 10,000
KILGORE, ROBERT 20,000
KILMARX, GEORGE & JUNE 10,000
85
KNERR, SHIRLEY 50,000
KOLESNIKOFF, EMERSON 10,000
KRAFTON, JOHN & SANDRA 5,000
KROMBOLZ, PHILLIP 20,000
KRUGER, LEON M 5,000
LANG, EILEEN 500
LICHTENSTEIN, ISRAEL & NESIA 5,000
LOPEZ, PATRICK 7,500
LUCE, STEPHEN (8) 5,000 113,427 *
LUPPINO, FRANCES 10,000
LURIO, DOUG AND MARGARET (9) 5,000 252,213 *
MARINO, SALVATORE 5,000
MASON, KATHLEEN 50,000
MAXWELL, LELAND (10) 5,000 272,050 *
MCCARTHY, G ELLARD 5,000
MCCARTY, THOMAS (11) 69,000 344,333 *
MCGARRAH, BOB 25,000
MEEKS, DR. JAMES E 12,500
MERRIMAN, JAMES F 5,000
MIGLIACCIO, AL 10,000
MILLER, HARLEY 5,000
MILLIGAN, DAVID 1,000
MOFFITT, WANDA S 5,000
NELSON, ELIZABETH 10,000
NISHA MEHTA INVESTMENTS (21) 60,000
PAKRADOONI, PETER 10,000
PAPA, GARY 10,000
PARKER, KATHY & DOUGLAS 2,000
PARKER, MICHAEL 5,000
PARKER, RICHARD & LAURA 10,000
PELTER, TIMOTHY 500
PONTON JR., JOHN W 5,000
QUINN, DANIEL 20,000
RAFFERTY, PAUL 10,000
RECKTENWALD, WILLIAM 10,000
RENNER IV, HARRY 10,000
ROBERTS, NOMA ANN 5,000
ROLFE, RANDALL C 1,000
ROPER, LEE & LISA 5,000
RUGART, KARL 10,000
SELLERS, WILLIAM (12) 130,000 782,108 *
SHAHEEN, LOUIS & JANET 5,000
SMITH, PATRICIA JILL 73,500
STETSON IV, JOHN & SOLVEIG 5,000
STEWART, HOMER 1,000
86
STITT, PRISCILLA 10,000
STULL, CLARK & CAROLYN 2,500
WHEELER, ARTHUR 20,000
WOLFE, CLAUDINE W 2,000
WOLFE, HOWARD H 1,500
WORDEN FAMILY PARTNERSHIP (22) 5,000
WORDEN, GEOFFREY 12,500
WRIGHT, JOHN D 5,000
YOCUM, GEORGE 4,000
YOUNG, FRANCES (13) 130,000 1,695,000 *
ZELENKA, DONALD 25,000
ZEYHER, LOIS & DAVID 5,000
---------
TOTAL 2,340,450
=========
- ------------
* Less than one percent (1%).
(1) Alex Consulting, Inc. is a consultant to USA on public relations and financial matters.
(2) Mr. Boynton is a Director of USA.
(3) Mr. DeMedio is an employee of USA.
(4) Fieldman, Hay & Ullman, LLP, represented USA in connection with prior litigation.
(5) Mr. Hamilton is an employee of USA.
(6) Adele Hepburn (the wife of Austin Hepburn) is the Director of Public Relations of USA.
(7) I.W. Miller Group, Inc. is our public relations firm.
(8) Mr. Luce is an employee of USA.
(9) Mr. Lurio is a Director and his law firm, Lurio & Associates, P.C., is general counsel to USA.
(10) Mr. Maxwell is the Chief Financial Officer of USA.
(11) Mr. McCarty is the President of Vista Marketing Research, Inc. which serves as a consultant to USA.
(12) Mr. Sellers is a Director of USA.
(13) Ms. Young is a former employee of USA.
(14) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares
held of record by the entity, Alex Consulting, Inc., is Paul Winkle.
(15) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Castor Group Ltd., is Conrad Meyer.
(16) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Fieldman, Hay & Ullman, is John Hay.
(17) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Gideon Trading Ltd., is Rich Joshi.
(18) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Hauptfuhrer Family Partnership, is Robert Hauptfuhrer.
(19) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Hrubala Assoc. A Partnership, is David R. Molumphy.
(20) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, I.W. Miller Group, is Ira W. Miller.
87
(21) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Nisha Mehta Investments, is Barry Herman.
(22) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Worden Family Partnership, is Geoffrey F. Worden.
(23) Represents 2,340,450 shares issued upon exercise of 1999-B Common Stock
Purchase Warrants at $1.00 per share. We have agreed to register these shares
for resale under the Act at our cost and expense until May 2003.
2001 - B COMMON STOCK PURCHASE WARRANTS
Common Stock
Hereby Offered Beneficial Ownership
After Offering
Selling Shareholder(11) ------------------- --------------------
------------------- Number Percent
------ -------
MICHELLE H & COSTA J ALVANOS 2,334
MICHELLE H ALVANOS 5,000
WAYNE A ANDERSON 16,667
CHARLES W APPLE 30,000
CHARLES M & NANCY P BARCLAY 15,000
88
DAVID C BLACKBURN 50,000
JOSEPH J BOLITSKY 106,667
E DOUGLAS & CAROLYN BRITTAIN 13,334
VINCENT J CALVARESE 6,667
JERROLD CARL & SUSAN E COHEN 50,000
JULIE CARLSON 132,000
GORDON S & MARYLOU C CLAUSEN 10,000
MARC A COHEN 70,000
GINO F. COLOMBO & JIM CROSS 6,667
JOHANNA CRAVEN 4,167
WILLIAM R CROTHERS 5,000
CLIFTON B CURRIN 33,334
WILLIAM K & LINDA S CURTIS 66,667
DAVID S D`ANGELO 43,334
HRUBALA ASSOCIATES, A PARTNERSHIP
DAVID R MOLUMPHY, PARTNER (4) 16,667
LEO J DOLAN 13,334
ROBERT F & MELANIE J DRESS 36,668
ANTHONY J FANELLI 30,000
JOHN S FOSTER 26,667
ROBERT R FREY 5,125
MARGARET R GEDDIS 3,334
RONALD C & BONNIE H GIBSON 12,334
HARRIET & CARY GLICKSTEIN 30,000
JULIUS GOLDEN 10,000
WILLIAM M GOLDSTEIN 20,000
NANCY HANSEN 10,000
NANCY HANSEN 13,334
NANCY HANSEN 187,334
CONG. SHARIT HAPLETA (5) 175,000
IRA FBO ROBERT A HAMILTON 16,667
WILLIAM F HARRITY JR 63,334
ROBERT P HAUPTFUHRER
FAMILY PARTNERSHIP (6) 20,000
JACK M HEALD 14,000
ANDREW B HEBENSTREIT 23,334
ANN HEBENSTREIT 10,000
ADELE H HEPBURN(1) 333,334 1,983,649 1.2%
AHP HOLDINGS, LP (7) 93,334
MICHELLE R HOLLENSHEAD 4,167
DAVID W HUBBERT 10,000
GORDON F HUDSON 15,000
MARK J HUDSON 15,000
NICHOLAS HUDSON 11,667
CHRISTINE F HUGES 5,834
HULL OVERSEAS, LTD (8) 85,000
89
STEVE ILLES 100,000 3,131,250 1.6%
STEVE & ELIZABETH ILLES 1,000,000 3,131,250 1.6%
ROBERT B & MARY LOU JACOBY 6,667
WILLIAM ROBERT JOHNSTON 50,000
DONALD R & JOAN F JONES SR 16,667
MICHAEL KATCHER 15,000
THOMAS A KATCHUR 100,000
GEORGE H & JUNE Y KILMARX 13,334
HARRIETTE D KLANN 6,667
SHIRLEY K KNERR 15,000
PHILLIP S KROMBOLZ 33,334
WARREN D LEWIS 11,667
H MATHER & MARGARET W LIPPINCOTT 1,167
CORNERSTONE PUBLIC
RELATIONS GROUP INC (9) 3,750
JAMES P MACCAIN 23,334
AIMEE MARCHAND 2,500
MARIEL MARCHAND 2,500
ROBIN H MARCHAND 11,667
KATHLEEN J MASON 153,334
CHARLES A MAYER 13,334
PETER J MCGUIRE 160,000
MICHAEL W MILES 30,000
HARLEY & BROOK MILLER 13,334
GEORGE W MOFFITT JR 45,000
KENNETH G MOLTA 6,667
ROBERT & ROSEMARY MONTGOMERY 13,334
ELIZABETH L NELSON 50,000
GREGG J NEWHUIS 293,334
JEFFREY M NEWHUIS 106,668
PAUL NORDIN 6,667
ALEX ORLIK 17,501
GEORGE O`CONNELL 160,000
SUSAN ODELL 23,334
ERIC PAGH 15,000
MICHAEL A PARKER 13,334
NEIL L PARKER 10,000
DOUGLAS A PERRY 4,167
LARRY R PERRY 4,167
MATTIE A & WILLIAM R PERRY 8,334
RICHARD D PERRY 4,167
ROY T PIRHALA 6,734
ROBERT H POTTS 11,667
BARBARA L PRESCOTT 2,500
CHARLES W & MARIA O PROCTOR III 1,667
PAUL RAFFERTY 33,334
PAUL J & D JOAN RAFFERTY 30,000
WILLIAM RECKTENWALD 40,000
HARRY RENNER IV 67,500
JOHN B RETTEW III 16,667
GEORGE B RICHARDSON 41,667
GARDINER ROGERS 10,000
90
KARL F RUGART 15,000
JOHN S RUPP 18,750
CHARLES SCHWAB & CO FBO PETER
A SANDS IRA ACCT 7780-9057 26,668
WILLIAM F SCHOENHUT JR 13,334
RICHARD SCHONWALD 250,000 1,842,875 *
MARY L SCRANTON 23,334
91
DANIEL E SPEALMAN 46,667
BB SECURITIES CO FBO
DANIEL E SPEALMAN IRA 29,167
MICHAEL & ELLEN STEIR 28,334
HOMER N & NATHALIE W STEWART 10,000
PRISCILLA STITT 2,000
EDWARD B STOKES 10,000
MARCUS B & EMIKO M STRINGFELLOW 40,000
WILLIAM L VAN ALEN JR(2) 13,334 270,671 *
ROBERT E WAGNER 27,857
HENRY W WESSELLS III 1,667
DELTA WESTERN COMPANY (10) 150,000
ARTHUR L WHEELER 33,334
J EDWARD WILLARD 26,667
WILLIAM W SELLERS TR UA
11/20/00 WILLIAM W
SELLERS REV TRUST(3) 26,667 1,129,689 *
MARGARET S WILLIAMS 34,334
ROBERT H WILLIAMS DDS
ASSOC PROFIT SHARING PLAN 75,000
DONALD J ZELENKA 90,000
RUTH ZWEIGBAUM 7,084
----------
TOTAL 5,751,080
==========
--------------
* Less than one percent (1%).
(1) Mrs. Hepburn is the Director of Public Relations of USA.
(2) Mr. Van Alen is a Director of USA.
(3) Mr. Sellers is a Director of USA.
(4) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Hrubala Associates, is David R. Molumphy.
(5) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Cong. Shearith Hapleta, is Leiby Solomon.
(6) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Robert P Hauptfuhrer Family Partnership, is Robert Hauptfuhrer.
(7) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, AHP Holdings, LP, is Alex H. Petro.
(8) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Hull Overseas, Ltd., is Mitch Hull.
(9) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of record
by the entity, Cornerstone Public Relations Group Inc., is M. Darlene Herbert Felt.
(10) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of record
by the entity, Delta Western Company, is George W. Moffitt.
(11) Represents 5,509,534 shares issued upon exercise of 2001- B Common Stock
Purchase Warrants at $.10 per share, and 241,546 shares issuable in the future
upon exercise of these warrants at $.10 per share.
92
2001-C COMMON STOCK PURCHASE WARRANTS
Common Stock Offered Beneficial Ownership
Selling Shareholder(5) Hereby After Offering
-------------------- -------------------- -------------------
Number Percent
------- -------
JACKSON L. ANDERSON 6,000
CHARLES W APPLE 10,000
KATHLYNE K BIRDSALL 2,500
EDWIN R BOYNTON (1) 25,000 414,762 *
WILLIAM P BURKS MD 2,500
AUGUST B CASTLE JR 31,358
ROBERT J CLARKE 10,000
JOHANNA CRAVEN 3,000
CLIFTON B CURRIN 3,000
BENJAMIN H DEACON 5,000
DONALD M & DIANNE M DENLINGER 6,000
LOUIS E & ROSE M DI RENZO 5,000
JAMES W EFFRON 7,000
ANTHONY J FANELLI 2,000
JOHN S FOSTER MD 30,000
ROBERT R FREY 4,950
JAMES P & JOYCE M GREAVES 10,000
KIRSTEN BAZURO(4) 5,000 185,775 *
DAVID DEMEDIO(4) 15,000 249,349 *
LARRY AND SHERYL GROFF 6,000
KENNETH R. HARRIS 2,400
ANDREW B. HEBENSTREIT 30,000
MAUREEN E. HENDRON 4,167
ADELE H. HEPBURN (2) 51,000 2,265,983 2.3%
93
ROBERT B. & MARY LOU JACOBY 6,000
THOMAS A. KATCHUR 10,000
HARRIETTE D. KLANN 5,000
LOIS A. LANDIS 2,000
LILY L. MCCARTNEY 4,000
AL MIGLIACCIO 10,000
HARLEY & BROOK MILLER 2,500
ELIZABETH L NELSON 10,000
SUSAN ODELL 20,000
ERIC PAGH 10,000
RICHARD G & LAURA J PARKER 4,000
STEPHEN LUCE (4) 5,000 113,427 *
ALEX ORLIK (4) 7,500 81,0083 *
ROY T PIRHALA 3,317
JOHN S RUPP 1,000
RAYMOND K SHOTWELL 1,000
DANIEL E SPEALMAN 9,000
HOMER N & NATHALIE W STEWART 3,000
PRISCILLA STITT 1,000
ALFRED HUNTER & SUSAN MARY THOMPSON 1,500
ANDREW ANDERSON & MARY LYNN THOMPSON 1,000
WILLIAM W SELLERS TR UA 11/20/00 50,000 862,108 *
WILLIAM W SELLERS REV TRUST (3)
MARGARET S WILLIAMS 9,000
ROBERT H WILLIAMS DDS ASSOC PROFIT 12,000
SHARING PLAN
RUTH ZWEIGBAUM 3,000
-------
TOTAL 467,692
------------
94
* Less than one percent (1%).
(1) Mr. Boynton is a Director of USA.
(2) Adele Hepburn and Austin Hepburn are husband and wife. Mrs. Hepburn is
the Director of Public Relations of USA.
(3) Mr. Sellers is a Director of USA.
(4) Employee of USA.
(5) Represents 399,125 shares issued upon exercise of 2001- C Common Stock
Purchase Warrants at $.10 per share and 68,567 shares issuable in the future
upon exercise of the remaining warrants at $.10 per share.
NOTEHOLDER PURCHASE WARRANTS
Beneficial Ownership
After Offering
--------------------
Selling Shareholder(43) Common Stock Offered Hereby Number Percent
------------------- --------------------------- ------- -----------
AANESTAD, DONALD T 30,000
ADAMSON, ANNA KATE 3,000
ADAMSON, BROOKE ANN 3,000
ADAMSON, JOSIAH DAVID 3,000
ADAMSON, MICAH PAUL 3,000
ADAMSON, PETER JOHN 3,000
AGANS, ROBERT M 105,000
AHP HOLDINGS (18) 110,001
95
ALEX CONSULTING(15)(19) 75,000 2,946,000 1.5%
ALIMACHANDANI, VIJAY 45,000
ALPERT, ALAN 7,500
ALVANOS, MICHELLE & COSTA 4,500
ALVAREZ, DELIA P 7,500
ANDERSON, JACKSON L 4,500
ANDERSON, WAYNE A 50,001
APPLE, CHARLES W 48,750
APPLE, CHARLES W & KATHARINE K 30,000
APPLE, SUSAN SCHRAMM 15,000
APPLE, THOMAS 15,000
ARDNT, BARRY C 7,500
AYERS, JOHN P 15,000
BACHICH, JOHN 150,000
BARCLAY, CHARLES & NANCY 75,000
BAZURO, ROBERT & KIRSTEN (2) 3,750 187,025 *
BECK, ROBERT E 3,000
BELIN JTWROS, MARION DOUGLAS & TEDDIE EARLINE 45,000
BELLAVIA, CHARLES F 15,000
BESCH, NANCY A & EARL D 15,000
BEYER, GUNTER J 15,000
BIRD, BENJAMIN LEE 15,000
BIRDSALL, KATHLYNE K 1,875
BIRTZ REVOCABLE LIVING TRUST 30,000
Bjorklund Trustee U/A Dated 11-11-88, Alexandra O 52,500
BLACKBURN, DAVID C 60,000
BLACKBURN, DONALD F 45,000
BODINE, LOUISE D 30,000
BOLITSKY, JOSEPH J 115,001
BOLLING, CHARLES L 15,000
BOURASSA, GARY R 7,500
BOYAR, LEA 7,500
BOYNTON PENSION PLAN, JAMES R 45,000
BOYNTON, EDWIN R(1) 48,750 279,137 *
BRAY, DAVID G 3,000
BRESLIN, BILLIE 15,000
BRILL SECURITIES (20) 45,000
BRITTAIN FAMILY TRUST (21) 10,001
BRITTAIN, DOUGLAS & CAROLYN 30,000
BRODINE, GORDON L 60,000
BROOKS, CAROLINDA P 30,000
BUDINETZ, MICHAEL J 21,375
BURKS MD, WILLIAM P 69,375
BUTLER, ESTATE OF SMEDLEY D 30,000
BUTLER, SUSAN L 22,500
CALVARESE, JOANNE C & VINCENT J 15,000
CALVARESE, VINCENT J 18,750
96
CAMPBELL, WILLIAM A 7,500
CAPE MACKINNON INC (22) 75,000
CARABASI MD, RALPH A 7,500
CARL, JERROLD & SUSAN COHEN 37,500
CARLSON, JULIE 114,000
CASTLE JR, AUGUST B 68,519
CHARRINGTON III, ARTHUR M.R. 15,000
CHARRINGTON, ARDIS B 15,000
CHIECO, MICHAEL G 37,500
CHIMICLES, BARBARA 15,000
CHIORDI, MICHAEL J 15,000
CIESIELSKI, JUDY A 60,000
CLARK JR, GERALD E 10,500
CLARKE, ROBERT J 208,500
CLAUSEN, GORDON S & MARY LOU C 33,750
CLOUTIER, DIANE 90,000
COFFEY, ROGER D 15,000
COHEN, MARC A 86,250
CONG. SHEARITH HAPLETA (23) 326,250
CORNERSTONE PUBLIC RELATIONS GROUP (24) 1,406
CRAVEN, JOHANNA 7,251
CRECRAFT, HELENA 15,000
CROSS, JIM & HELEN COLUMBO 5,000
CROTHERS, WILLIAM R 9,375
CROW, DUDLEY R 15,000
CROW, LORRAINE 1,500
CUNNINGHAM MD, T DAVID 15,000
CURRIN TRUSTEE, CLIFTON B 89,751
CURTIS, A KENNETH & WILLIAM K 30,000
CURTIS, WILLIAM K 37,500
CURTIS, WILLIAM K & LINDA S 90,000
D`ANGELO, DAVID S 91,251
DEACON, BENJAMIN H 18,750
DELLARUSSO, RICHARD J 15,000
DELTA WESTERN COMPANY (25) 56,250
DEMARIS, SHERI LYNN 154,500
DEMEDIO, DAVID M (2) 18,750 256,849 *
DENLINGER, DONALD & DIANNE 18,000
DI RENZO, LOUIS & ROSE 7,500
DILIGENT FINANCE CO LTD(15)(26) 480,000 1,898,000 1.0%
DIN, ANEES T 40,500
DIRENZO, LOUIS & ROSE 3,750
DOLAN, LEO J 42,000
DRESS, ROBERT & MELANIE 11,000
DRESSLER, MITCHELL 15,000
DURYEA, JUSTIN G 11,250
EFFRON, HOWARD 15,000
EFFRON, JAMES 5,250
ELLIOTT, BEN 60,000
ELLNER, SOLOMON 75,000
ELLSHAY LLC (27) 30,000
EVANKO, DR. MARK A 1,500
FANELLI, ANTHONY 40,500
FIELDMAN, HENRY J(3) 45,000 1,592,700 *
97
FINN STAFF 30,000
FIRESTONE, JEFFREY 60,000
FORIGO, DANIELE 53,573
FOSTER, JOHN S 102,501
FOX, HELEN K 15,000
FREY, ROBERT R 5,634
FULMER, SAMANTHA HARRIS 1,500
FUSARO, ANTHONY A 45,000
GALVIN, DOROTHY 1,500
GEDDIS, MARGARET R 10,001
GFG CONSULTING (28) 186,850
GIBSON, RONALD & BONNIE 10,001
GIDDENS, ROBERT G 90,000
GILLESPIE, GALE S 7,500
GIVEN, CHARLOTTE(15) 186,850 282,000 *
GLICKSMAN, RACHEL 72,000
GLICKSTEIN, HARRIET & CARY 67,500
GLOCKNER, FREDERICK & JOAN 1,500
GOLDEN, JULIUS 7,500
GOLDSTEIN, WILLIAM M 75,000
GOMES, GREGORY R 75,000
GOTTLIEB, MIKLOS 15,000
GRAY, HAROLD N 60,000
GREAVES, JAMES & JOYCE 7,500
GREEN, JOHN R 30,000
GREGORY, ALAN V 15,000
GROFF, LARRY K & SHERYL L 4,500
GUERIERA JR, ROBERT 30,000
HAINEY, BOB 75,000
HALDEMAN, EDWARD 30,000
HALDEMAN, PAULINE E 30,000
HALL, ROBERT & VIRGINIA 7,500
HAMILTON, JOHN E 4,500
HAMILTON, ROBERT A(2) 13,650 89,026 *
HAMILTON, IRA FBO ROBERT A (2) 6,300 89,026 *
HANSEN, NANCY H 138,000
HARRIS JR, BURT I 240,000
HARRIS, BURT I 240,000
HARRIS, KENNETH R 7,555
HARRIS, KENNETH R & BETTY A 30,000
HARRIS, PETER A & DEBORAH L 7,500
HARRITY JR, WILLIAM F 137,501
HARRITY, R JOHNSTONE 15,000
HARRITY, VIRGINIA W 7,500
HAUPTFUHRER FAMILY PARTNERSHIP, ROBERT P (29) 67,500
HAUPTFUHRER, BARBARA D 52,500
HAY, JOHN(4) 45,000 1,592,700 *
HEALD FAMILY TRUST (30) 30,000
HEALD, CYNTHIA & JACK 15,000
HEALD, JACK M 8,750
HEBENSTREIT, ANDREW B 130,001
HEBENSTREIT, ANN 22,500
HEBENSTREIT, LISA 12,000
HEBENSTREIT, SAM B 10,500
HEBENSTREIT, TIMOTHY B 16,500
98
HEBENSTREIT, TODD 12,000
HENDRON MD, MAUREEN E 102,500
HEPBURN, ADELE H (5) 470,751 1,846,232 *
HEPBURN, AUSTIN B(5) 44,549 4,110,488 2.1%
HERBERT, STEPHEN P (6) 75,000 1,488,720 *
HERBERT, JULIE(18) 75,000 1,488,720 *
HEWSON, THOMAS A 30,000
HODGES, JOYCE 7,500
HOLLENSHEAD, MICHELLE 3,125
HOLMWOOD, JAMES M 30,000
HOLT, ALTON R 78,000
HRUBALA ASSOCIATES, A PARTNERSHIP (31) 36,251
HUBBERT, DAVID W 26,250
HUDSON, GORDON F 30,000
HUDSON, MARK J 15,750
HUDSON, NICHOLAS C 9,150
HUDSON, WILBUR E 7,500
HUGHES, CHRISTINE F 15,626
HYMAN, MICHAEL 15,000
IGNITE CAPITAL (32) 75,000
ILLES, STEVE 450,000 3,781,250 1.9%
INTERNET PR GROUP (33) 15,000
IRA FBO BETTY A HARRIS DLJSC 15,000
IRA FBO KENNETH R HARRIS DLJSC 15,000
IRA FOR ROBERT E WAGNER 30,000
J.M. HULL ASSOCIATES LP (34) 31,875
JACKSON, NATA M 60,000
JACOBY, ROBERT & MARY LOU 34,001
JALMARSON, CRAIG H 9,000
JENKINS, WENDY (3) 30,000 142,000 *
JENSEN JR, GEORGE R(7) 240,000 519,000 *
JENSEN, BURTON 15,927
JENSEN, DAVID 15,927
JENSEN, GEORGE R & RON RAYMOND(7) 150,000 609,000 *
JENSEN, JULIE(7) 75,000 1,472,200 *
JOHNSTON, WILLIAM ROBERT 37,500
JONES JTWROS, ROBERT F & DEBORAH L 60,000
JONES SR, DONALD & JOAN 2,000
JONES, CHARLES T 7,500
JONES, DONALD & JOAN 6,252
KARN, GLORIA S & FRED S 1,500
KATCHUR, MICHAEL 11,250
99
KATCHUR, THOMAS A 187,500
KATCHUR, THOMAS JOHN 31,200
KEFFER, JOHN & RAELENE 15,000
KENT, MAUDE WOOD 15,000
KENT, MAUDE WOOD & THOMAS D 15,000
KILGORE, KATHLEEN COUGHLIN 15,000
KILGORE, ROBERT A 75,000
KILMARX, GEORGE H & JUNE 85,001
KIM, ANTHONY Y.K. 75,000
KLANN TRUST, HARRIETTE D 5,000
KLANN, HARRIETTE D 22,500
KNERR, SHIRLEY K 45,000
KNODE, RALPH H 30,000
KOBUS, GREGORY & ALICE 15,000
KOLLS, CHRISTINE C (19) 45,000 910,850 *
KONSMO, OYSTEIN 18,750
KROMBOLZ, PHILLIP S 30,000
KROMBOLZ, ROCHELLE L & PHILLIP S 30,000
KROOK, NANCY 105,000
LAND, JEFFREY R 15,000
LANDIS, LOIS 1,500
LANNI, PAUL G 15,000
LAW, JEANNINE P 15,000
LEBOUTILLIER, SHERRILL F 150,000
LEE TRUST W/D/T 10/5/92, JOHN N 45,000
LEE, STEVEN 3,750
LEENE, JENNIFER BEIRNES 15,000
Legg Mason Cust FBO DennisL Gilbert IRA 15,000
LEGG MASON FBO RICHARD SCHONWALD IRA 22,500
LEHMANN, AARON 55,500
LEROUX, SHELLEY 45,000
LEWIS, WARREN D 23,751
LEXINGTON VENTURES INC (35) 90,000
LIPPINCOTT JR, H MATHER 22,500
LIZZUL, PAUL & DAWN-MARIE 15,000
LOCKHART, LORETTA 8,573
LOCKHART-HEBERTON, CYNTHIA 750
LOPEZ, ANTHONY & BARBARA 15,000
LOPEZ, PATRICK 15,000
100
LOZOWSKI, ROBERT 3,000
LUCE, STEPHEN M.(2) 5,000 113,427 *
LUPPINO, FRANCES 15,000
LURIO, DOUGLAS(9) 22,500 234,713 *
LURIO, DOUGLAS M & MARGARET SHERRY(9) 45,000 212,213 *
MacCAIN, JAMES P 40,001
MACCARTNEYROBERT F & LILY L 15,000
MACKENZIE, DONALD 30,000
MADAN, LEWIS F 3,000
MALISCHEWSKI, ALBERT P & MARY E 15,000
MALONEY, VIRGINIA MARSHALL 1,500
MARCHAND, AIMEE 1,875
MARCHAND, MARIEL 1,875
MARCHAND, ROBIN 8,750
MARIE G ROPER, MARIE G 7,500
MARINO, SALVATORE 15,000
MARKOWITZ DDS Retirement Fund, IRWIN H 75,000
MARTIN, C LEONARD 30,000
MASON, KATHLEEN J 160,001
MAX COMMUNICATIONS (36) 90,000
MAYER, CHARLES A 21,000
MCCABE, BARRY N 15,000
MCCARTHY, DUANE C 1,500
MCCARTHY, G ELLARD & JOAN R BENNETT 7,500
MCCARTNEY, LILY 3,000
McCauley Jr Trustees, David E & Sue A 45,000
MCCORMICK, JOHN F 37,500
MCGARRAH, ROBERT G (15) 45,000 413,000 *
MCGONIGLE, JOHN & ROSEMARY 1,500
MCGONIGLE, MARY C 1,500
MCGUIRE, PETER J 225,000
MERRIMAN, JAMES F 82,500
MIGLIACCIO, AL 7,500
Millennium Trust Co, Llc Cust f/b/o Fred KaragosianTR#1505257 15,000
MILLER, EILEEN & LAWRENCE 6,000
MILLER, HARLEY & BROOK 31,626
MILLIKIN, GEORGE & CAROLINE 45,000
MOFFITT JR, GEORGE W 31,875
MOFFITT REVOCABLE TRUST DATED 9/25/97, WANDA S 15,000
MOLUMPHY CAPITAL MGMT Profit Sharing (37) 15,000
MOLUMPHY, THOMAS J 7,500
MONTGOMERY, ERNEST E 15,000
MONTGOMERY, ROBERT & ROSEMARY 25,001
MONTGOMERY, ROBERT H 30,000
MORGAN JR, MILTON K & LOIS T 15,000
MORRIS, MAC G 7,500
MOSIER, JAMES 30,000
MOYER, F STANTON 37,500
MURPHY, RICHARD F 30,000
101
MURRAY, BARBARA J 15,000
NASH, GARY 3,000
NEFF, RONNIE 15,000
NELSON, ELIZABETH L 71,250
NEMETH, ROBERT F 30,000
NEWHUIS, GREGG J 300,000
NEWHUIS, JEFFREY M 20,003
NIX, JOHN BRADLEY & CAROL C 4,500
NOLAN, PATRICK 35,213
NORDIN, PAUL 5,000
OAKLAND, GARY 22,500
OCONNELL, GEORGE 360,000
ODELL, SUSAN 32,501
O`NEILL, J BRIAN 22,500
ORLIK, ALEX (2) 18,188 82,583 *
PADRICK, ROBERT 60,000
PADRICK, TRUSTEE, ROBERT G PADRICK P/S/P AND TRUST, ROBERT G. 30,000
PADRICK, TRUSTEE FBO KELLIE NICOLE PADRICK, ROBERT G. 15,000
PAGH, ERIC 18,750
PAKRADOONI, PETER B 30,000
PANORAMA PARTNERS (38) 4,500
PARKER, MICHAEL A 5,000
PARKER, NEIL L 7,500
PARKER, RICHARD 15,000
PARKER, RICHARD & LAURA 49,500
PELLEGRINO, JOSEPH 300,000
PENJUKE, WILLIAM & CAROL 15,000
PERRY, DOUGLAS 3,125
PERRY, LARRY R 3,125
PERRY, MATTIE & WILLIAM 71,250
PERRY, RICHARD 3,125
PETT, ROBERT 150,000
PIRHALA, ROY T 86,262
PONTON JR, JOHN W 15,000
POTTS, ROBERT H 30,000
POWELL, J STEVE 4,500
PRESCOTT, BARBARA L 1,875
PROCTOR, CHARLES & MARIA 625
RAFFERTY, PAUL & JOAN 47,501
RANSOME III, ERNEST L 22,500
RECKTENWALD, WILLIAM 75,000
REICHL, THOMAS C 4,500
REISNER, GREG A 15,000
REISNER, WILLIAM & FRANCES 33,000
RENNER IV, HARRY 125,625
RETTEW III, JOHN B 20,001
REYBOK, ROBERT & JOAN 15,000
RICHARDSON, GEORGE & SHARON 15,625
102
RICHARDSON, GEORGE B 15,625
ROBERTS, NOMA ANN 45,000
Rogers JR. Family LIimited Partnership, E H (39) 30,000
ROGERS, DOYLE 15,000
ROGERS, GARDINER 16,500
ROPER, LEE R & LISA ANN 67,500
ROPER, MARIE G 22,500
ROSENTHAL, JERRY 30,000
ROUSE III, GEORGE PARKE 15,000
RUBEN, PETER S 180,000
RUGART, KARL F 48,750
RUPP, FRANK S 15,000
RUPP, JOHN S 70,125
SAS, VALENTINA 3,000
SCAMMAHORN, KEITH & LYNNE 15,000
SCHOENHUT III, WILLIAM F 30,000
SCHOENHUT JR, WILLIAM F 70,001
SCHOENHUT, EDWARD L 30,000
SCHOLL PROFIT SHARING PLAN, DB 15,000
SCHOLL, MARGARET J 15,000
SCHONWALD, RICHARD S 333,750
SCHWARTZ, STEPHEN 37,500
SCIFERS, VICKI S 15,000
SCRANTON, MARY L 8,750
SELDERS, THOMAS A & KRISTIN M 7,500
SELLERS TRUST, WILLIAM W (17) 47,500 864,608 *
SELLERS, NICHOLAS 15,000
SELLERS, WILLIAM W (17) 135,000 777,108 *
SELTZER, SCOTT 7,500
SHEVLIN, CELIA E 3,000
SHOTWELL, RAYMOND K 8,250
SHUPE, JOHNNYE F 1,500
SHUTE, HARRY D 7,500
SICHEL JR, LEONARD H 15,000
SINGER, JOSEPH 1,500
SINGER, LESLIE & ETHEL 15,000
SINGH, KRISHNA K 45,000
SMITH, RICHARD(15) 180,000 120,000 *
SMITLEY, KATHY 7,500
SNYDER, MELVIN G 15,000
SPEALMAN IRA, DANIEL 25,938
SPEALMAN, DANIEL E 58,500
STANGLEIN, TERRY W 54,000
STEINHILBER, ELINOR M 15,000
STEIR, MICHAEL & ELLEN 18,750
STERN, SHAI L (10) 37,500 178,750 *
STETSON IV, JOHN B 30,000
STETSON, CPT ERIC W 7,500
103
STETSON, SCOTT W 1,500
STETSON, SOLVEIG W 15,000
STEVENS, GERTRUDE 37,500
STEWART, HOMER & NATHALIE 13,050
STEWART, HOMER N 15,000
STITT, PRISCILLA A 32,250
STOKES, EDWARD B 45,000
STRINGFELLOW, MARCUS & EMIKO 15,000
STROUD, VIVIAN K (2) 7,500 188,294 *
STULL JTWROS, CLARK D & CAROLYN S 30,000
STULL, CLARK D 1,050
SVEDAS, WILLIAM 1,500
SWANTON,TERRY L & MOLLY B 30,000
SZYCHOSKI, GEORGE E 150
SZYCHOSKI, MICHAEL W 375
SZYMBORSKI, CONSTANTINE T 15,000
TAUBER, BARBARA ANN 1,500
TECHNOLOGY PARTNERS(11)(40) 652,647 1,855,510 *
TEQUESTA CAPITAL CORP (41) 21,428
THOMPSON, ALFRED & SUSAN 4,125
THOMPSON, ANDREW & MARYLYNN 750
THOROUGHGOOD, WILLIAM E 3,750
TORRES, GUILLERMO M 30,000
TRINITY ASSOCIATES (42) 165,000
TURESKY, STEPHEN S 15,000
TURNER, JAMES 60,000
ULLMAN, ANTHONY B(12) 45,000 1,592,700 *
UNANUE, CURTIS & MARIA 45,000
VAN ALEN JR, WILLIAM L(13) 35,001 411,001 *
VESPER JR, JOHN H 7,500
VODANTIS, JOHN S & HOPE J 7,500
WAGNER, ROBERT E 35,894
WAHLSTROM, BORJE 15,000
WAHLSTROM, JEAN STEEL 15,000
WEAVER, DAVID 7,800
WEAVER, DWANE M 15,000
WEAVER, KEVIN & ALICIA 45,000
WEAVER, MARLENE 150,000
WEAVER, MICHAEL L 1,500
WEAVER, WESLEY R 22,500
WESSELLS III, HENRY W 5,001
WHEELER, ARTHUR L 1,102,500
WIENER, ARTHUR 8,015
WIENER, ARTHUR & RUTH 9,825
WIENER, BERNARD 7,500
WILLARD, J EDWARD 147,501
WILLIAMS DDS PROFIT SHARING 88,500
WILLIAMS, MARGARET S 53,700
WILSON, KENNETH B 7,500
WOLFE, CLAUDINE W 4,500
104
WRIGHT, C EDWIN & JANET LYN 7,500
WRIGHT, JOHN D 15,000
WRIGHT, WILLIAM M 15,000
WYMAN JR, SAMUEL D 15,000
YAMAGUCHI, JONI CARLEY 15,000
YOSHIMOTO, CRAIG 15,000
YOUNG, FRANCES(14) 705,000 1,120,000 *
YUTZY, JOHN A & LUCINDA K 12,000
ZELENKA, DONALD J 213,750
ZIRBES, JOSEPH 7,500
ZWEIGBAUM, RUTH 15,063
TOTAL 20,720,051
----------
* Less than one percent.
105
(1) Mr. Boynton is a Director of the Company.
(2) Employee of the Company.
(3) Mr. Feildman is a member of the law firm of Fieldman, Hay & Ullman, LLP,
which represented the Company in connection with prior litigation.
(4) Mr. Hay is a member of the law firm of Fieldman, Hay & Ullman, LLP,
which represented the Company in connection with prior litigation.
(5) Adele and Austin Hepburn are husband and wife. Adele Hepburn is the Director of Public Relations of the Company.
(6) Mr. Herbert is President, Director and Chief Operating Officer of the Company.
(7) George and Julie Jensen are husband and wife. Mr. Jensen is Chairman of the
Board and Cheif Operating Officer of the Company.
(8) Son of George Jensen.
(9) Douglas and Magaret Lurio are husband and wife. Mr. Lurio is a Director of the Company and he is
the President of Lurio Associates, P.C.
(10) Mr. Stern is a consultant to the Company.
(11) Technology Partners is the Company`s investment banker.
(12) Mr. Ullman is a member of the law firm of Fieldman, Hay & Ullman, LLP, which represented the Company in
connection with prior litigation.
(13) Mr. Van Alen is a Director of the Company.
(14) Ms. young is a former employee of the Company.
(15) Consultant to the Company.
(16) Spouse of H. Brock Kolls
(17) Director of USA
(18) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, AHP Holdings, is Alex H. Petro.
(19) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Alex Consulting, is Paul Winkle.
(20) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Brill Securities, is Larry Berk.
(21) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Brittain Family Trust, is E. Douglas Brittain.
(22) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Cape MacKinnon, Inc., is Steve Frye.
(23) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Cong. Shearith Hapleta, is Leiby Solomon.
(24) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Cornerstone Public Relations Group, is M. Darlene Herbert Felt.
(25) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Delta Western Company, is George W. Moffitt.
(26) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Diligent Finance Co. Ltd., Rai Hamilton.
(27) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Ellshay LLC, is Mark Erlich.
(28) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, GFG Consulting, is Grant Galloway.
(29) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Hauptfuhrer Family Partnership, is Robert Hauptfuhrer.
(30) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Heald Family Trust, is Jack Heald.
(31) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Hrubala Associates, a Partnership, is David R. Molumphy.
(32) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Ignite Capital, is Richard Gonda.
106
(33) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Internet PR Group, is Roland Perry.
(34) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, J.M. Hull Associates LP, is Mich Hull.
(35) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Lexington Ventures, Inc., is Larry Gordon.
(36) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Max Communications, is Richard Molinsky.
(37) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Molumphy Capital Mgmt. Profit Sharing, is Mitch Hull.
(38) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Panorama Partners, is Aaron Lehmann.
(39) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, E H Rogers Jr. Family Limited Partnership, is Edmund H. Rogers.
(40) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Technology Partners, is Porter Bibb.
(41) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Tequesta Capital Corp., is Gary F. Lobrozzi.
(42) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Trinity Associates, is Michael K. Stern.
(43) Represents shares issuable upon exercise of warrants issued to all of our
holders of Senior Notes in October 2002. Of the shares being registered,
6,493,691 have already been issued upon exercise of warrants at $.10 per share
and 14,226,360 are reserved for issuance upon future exercise of these warrants
at $.10 per share. We have agreed to register these shares for resale under the
Act at our cost and expense until April 2004.
107
EMPLOYEE COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder(3) Offered Hereby Number Percent
------------------- -------------- ------ --------
Bazuro, Kirsten (1) 160,000 30,775 *
Demedio, David(1) 160,000 104,349 *
Harrum, George(1) 80,000 14,333 *
Ledesma, Cecil(1) 80,000 90,500 *
Luce, Steven(1) 80,000 38,427 *
Sagady, Cary(2) 160,000 0 *
Seymour, Amy(1) 80,000 11,550 *
Stroud, Vivian(1) 160,000 35,794 *
Tobin, Mary F.(1) 80,000 25,217 *
Vista Marketing Research(2) 280,000 133,333 *
Wasserman, Scott(1) 160,000 0 *
----------------
Total 1,480,000
--------
* less than one percent
(1) Current employee of USA.
(2) Current consultant of USA.
(3) Represents shares issued to employees and consultants in October 2002 at
$.15 per share for services to be rendered to USA. We have agreed to register
these shares for resale under the Act for a period of 9 months at our cost and
expense.
108
SENIOR NOTE INTEREST SEPTEMBER 2003 COMMON STOCK & WARRANTS
Common Stock & Warrants Beneficial Ownership
Selling Shareholder Offered Hereby After Offering
--------------------------- ---------------------------- -------------------------
Number Percent
-------------------------
Donald T Aanestad 1,800 *
Vijay Alimachandani 2,300 *
Alan Alpert 1,500 *
John P Ayers 3,000 *
John Bachich 15,000 *
Charles F Bellavia 900 *
Nancy & Earl Besch 3,000 *
Gunter J Beyer 1,200 *
Benjamin Lee Bird 3,000 *
Kathlyne K Birdsall 375 *
David C Blackburn 1,300 *
Joseph Bolitsky 20,000 *
Edwin R Boynton (1) 9,750 318,137 *
David G Bray 600 *
Douglas & Carolyn Brittain 3,000 *
Brittain Family Trust 2,000 *
Gordon L Brodine 8,050 *
Michael J Budinetz 3,000 *
Vincent Calvarese 3,750 *
William A Campbell 1,500 *
Ralph A Carabasi 1,500 *
Julie Carlson 2,367 *
Michael J Chiordi 3,000 *
Gerald E Clark Jr 2,100 *
Robert J Clarke 17,393 *
Diane Cloutier 18,000 *
Roger D Coffey 867 *
Marc A Cohen 17,250 *
Cornerstone Public Relations
Group, M Darlene Herbert Felt 281 *
Johanna Craven 1,276 *
109
Jim Cross 1,000 *
William R Crothers 1,876 *
Lorraine Crow 300 *
Benjamin Deacon 750 *
Delta Western Company (2) 11,250 *
David Demedio (3) 3,750 *
Louis E Di Renzo 1,500 *
Diligent Finance Company Ltd (4) 96,000 *
Leo J Dolan 6,000 *
Robert F Dress 2,200 *
Howard Effron 3,000 *
Bently Elliott 3,000 *
Ellshay Llc (5) 3,000 *
Anthony J Fanelli 800 *
Henry J Fieldman 9,000 *
John S Foster 20,500 *
Helen K Fox 2,698 *
Samantha Harris Fulmer 300 *
Dorothy Galvin 300 *
Margaret R Geddis 750 *
Robert G Giddens 27,000 *
Frederick F Glockner 300 *
William M Goldstein 9,000 *
Ira Fbo Robert A Hamilton (6) 1,260 *
John E Hamilton 900 *
Robert Hamilton (6) 2,730 *
Peter & Deborah Harris 1,500 *
George Harrum (7) 833 *
John Hay 9,000 *
Heald Family Trust (8) 6,000 *
Andrew B Hebenstreit 11,000 *
Joyce Hodges 1,500 *
Michelle Hollenshead 625 *
James M Holmwood 6,000 *
Hrubala Associates, A Partnership (9) 3,834 *
Gordon F Hudson 5,150 *
Christine F Hughes 750 *
William Robert Johnston 1,500 *
Charles T Jones 1,500 *
F/B/O Fred Karagosian 3,000 *
Gloria & Fred Karn 300 *
Michael Katchur 2,250 *
Maude Wood Kent 3,000 *
Thomas & Maude Woodkent 3,000 *
Robert A Kilgore 15,000 *
Shirley K Knerr 2,700 *
Gregory S Kobus 3,000 *
Christine F Kolls 9,000 *
Paul G Lanni 3,000 *
Warren D Lewis 1,750 *
Lexington Ventures Inc (10) 7,600 *
H Mather Lippincott Jr 3,000 *
Anthony F Lopez 3,000 *
Robert Lozowski 173 *
Douglas Lurio (11) 4,500 *
James P Maccain 8,000 *
Lewis F Madan 600 *
Kathleen Mason 26,000 *
Charles Mayer 4,200 *
Barry N Mccabe 433 *
Duane C Mccarthy 300 *
G Ellard Mccarthy 1,500 *
John P Mcgonigle 300 *
110
Mary C Mcgonigle 300 *
James F Merriman 13,634 *
Eileen Miller 1,200 *
Harley Miller 5,608 *
Wanda S Moffitt 3,000 *
George W Moffitt Jr 3,375 *
Thomas Molumphy 1,500 *
Molumphy Capital Mgmt (12) 3,000 *
Robert Montgomery 8,000 *
Mac G Morris 1,500 *
James H Mosier 600 *
Elizabeth L Nelson 10,284 *
Robert F Nemeth 3,000 *
Gregg J Newhuis 18,000 *
Jeffrey M Newhuis 2,100 *
Patrick Nolan 6,000 *
Paul Nordin 1,000 *
George O`connell 45,000 *
Panorama Partners Lp (13) 100 *
Michael A Parker 1,000 *
Neil L Parker 950 *
Richard Parker 1,583 *
Joseph Pellegrino 26,667 *
Robert H Potts 3,000 *
Charles W Proctor Iii 125 *
Ernest L Ransome Iii 1,500 *
Harry Renner Iv 12,000 *
John B Rettew Iii 2,500 *
Gardiner Rogers 3,300 *
Marie G Roper 1,500 *
Karl F Rugart 8,250 *
John S Rupp 1,392 *
Valentina Sas 600 *
Edward L Schoenhut 6,000 *
William F Schoenhut Jr 8,366 *
Stephen Schwartz 7,500 *
Mary L Scranton 1,750 *
Nicholas Sellers 3,000 *
William W Sellers Tr Ua 11/20/00 William W
Sellers Rev 24,500 887,608 *
Amy T Seymour (15) 67 *
Raymond K Shotwell 616 *
Leonard H Sichel Jr 3,000 *
Richard Smith 36,000 *
Kathy Smitley 142 *
Melvin G Snyder 900 *
Terry W Stanglein 7,500 *
Elinor Steinhilber 3,000 *
Michael Steir 2,466 *
Cpt Eric W Stetson 1,500 *
Homer N Stewart 3,000 *
Vivian K Stroud (16) 2,400 *
Clark D Stull 6,210 *
George E Szychoski 30 *
Michael W Szychoski 75 *
Constantine Teofil Szymborski 3,000 *
Technology Partners (17) (20) 115,528 *
Tequesta Capital Corp (18) 467 *
Alfred Hunter Thompson 418 *
Andrew Thompson 150 *
James Turner 4,932 *
Anthony B Ullman 9,000 *
William L Van Alen Jr (19) 2,067 271,938 *
David L Weaver 660 *
Dwane M Weaver 867 *
Marlene Weaver 30,000 *
Michael L Weaver 300 *
Wesley R Weaver 1,500 *
Arthur L Wheeler Acct #216-39u48 39,000 *
Arthur & Ruth Wiener 1,881 *
Arthur A Wiener 970 *
Bernard Wiener 1,500 *
J Edward Willard 15,000 *
Kenneth B Wilson 517 *
C Edwin Wright 217 *
John D Wright 1,850 *
Craig Yoshimoto 3,000 *
Ruth Zweigbaum 3,212 *
Total 1,058,648 (21)
111
(1) Mr. Boynton is a director of the company.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entitiy, Delta
Western Company, is George W Moffitt.
(3) Mr. DeMedio is an employee of USA.
(4) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entitiy, Diligent
Finance Company Ltd, is Rai Hamilton.
(5) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entitiy, Ellshay
LLC, is Mark Erlich.
(6) Mr. Hamilton is an employee of USA.
(7) Mr. Harrum is an employee of USA.
(8) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entitiy, Heald
Family Trust, is Jack Heald.
(9) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entitiy, Hrubala
Associates, A Partnership, is David R Molumphy.
(10) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entitiy, Lexington
Ventures, is Larry Gordon.
(11) Mr. Lurio is a director and his law firm, Lurio & Associates, P.C., is
general counsel to USA.
(12) The natural person who exercises sole and/or
shared voting or dispositive powers with respect to the shares held of
record by the entitiy, Molumphy Capital Mgmt, is Thomas J Molumphy.
(13) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entitiy,
Panorama Partners LP, is Aaron Lehmann.
(14) Mr. Sellers is a director of USA.
(15) Mrs. Seymour is an employee of USA.
(16) Ms. Stroud is an employee of USA.
(17) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entitiy, Technology
Partners, is Porter Bibb.
(18) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entitiy, Gary F
Lobrozzi.
(19) Mr. Van Alen Jr. is a director of USA.
(20) Technology Partners is the Company`s investment banker.
(21) Represents 529,324 shares issued at $.20 per share and 529,324 shares
underlying warrants to purchase our shares at $.20 per share at any time
through June 30, 2004. These shares and warrants were issued to our senior
noteholders who elected to receive shares in lieu of cash for the September
30, 2002 quarterly interest payment. For each share issued, the holder also
received one warrant. We have agreed to register these shares for resale
under the Act at our cost and expense until September 2004.
112
SENIOR NOTE INTEREST DECEMBER 2002 COMMON STOCK & WARRANTS
Common Stock & Warrants Beneficial Ownership
Selling Shareholder Offered Hereby After Offering
---------------------------- ---------------------- -----------------------
Number Percent
-----------------------
Donald T Aanestad 6,000 *
Vijay Alimachandani 9,000 *
Alan Alpert 1,500 *
John P Ayers 3,000 *
John Bachich 15,000 *
Charles F Bellavia 3,000 *
Nancy & Earl Besch 3,000 *
Gunter J Beyer 3,000 *
Benjamin Lee Bird 3,000 *
Kathlyne K Birdsall 375 *
Joseph J Bolitsky 20,000 *
Edwin R Boynton (1) 9,750 323,012 *
David G Bray 600 *
Douglas & Carolyn Brittain 5,534 *
Brittain Family Trust (2) 2,000 *
Gordon L Brodine 11,770 *
Michael J Budinetz 3,913 *
Vincent J Calvarese 3,750 *
Julie Carlson 3,000 *
Michael J Chiordi 3,000 *
Gerald E Clark Jr 2,100 *
Diane Cloutier 18,000 *
Roger D Coffey 3,000 *
Marc A Cohen 17,250 *
Cornerstone Public Relations 281 *
Group, M. Darlene Herbert Felt 0 *
Jim Cross 1,000 *
William R Crothers 1,876 *
Lorraine Crow 300 *
Clifton B Currin Trust 4,000 *
Benjamin Deacon 750 *
Delta Western Company (3) 11,250 *
Sheri Lynn Demaris 5,612 *
David Demedio (4) 3,750 *
Louis E Di Renzo 1,500 *
Diligent Finance Company Ltd (5) 96,000 *
Anees T Din 5,400 *
Leo J Dolan 6,000 *
Robert F Dress 2,200 *
Howard Effron 3,000 *
Bently Elliott 3,000 *
Anthony J Fanelli 3,000 *
John S Foster 20,500 *
Helen K Fox 3,000 *
Samantha Harris Fulmer 300 *
Dorothy Galvin 300 *
Margaret R Geddis 750 *
Robert G Giddens 28,456 *
Frederick F Glockner 300 *
William M Goldstein 9,000 *
Ira Fbo Robert A Hamilton (6) 1,260 *
113
John E Hamilton 900 *
Robert A Hamilton (6) 2,730 *
Peter & Deborah Harris 1,500 *
Heald Family Trust (7) 6,000 *
Andrew B Hebenstreit 11,000 *
Adele Hepburn (8) 30,000 2,301,983 1.2%
Joyce Hodges 1,500 *
Michelle Hollenshead 625 *
James M Holmwood 6,000 *
Hrubala Associates (9) 6,000 *
Gordon F Hudson 6,000 *
Christine F Hughes 750 *
Wendy Jenkins (10) 3,933 *
William Robert Johnston 1,500 *
Charles T Jones 1,500 *
F/B/O Fred Karagosian 3,000 *
Gloria & Fred Karn 300 *
Michael Katchur 2,250 *
Maude Wood Kent 3,000 *
Thomas & Maude Wood Kent 3,000 *
Robert A Kilgore 15,000 *
Shirley K Knerr 2,700 *
Gregory S Kobus 3,000 *
Christine F Kolls -9,000 *
Paul G Lanni 3,000 *
Warren D Lewis 4,750 *
H Mather Lippincott Jr 3,000 *
Anthony F Lopez 3,000 *
Robert Lozowski 600 *
Douglas Lurio (11) 4,500 254,963 *
James P Maccain 8,000 *
Lewis F Madan 600 *
Kathleen J Mason 26,000 *
Barry N Mccabe 3,000 *
Duane C Mccarthy 300 *
G Ellard Mccarthy 1,500 *
Bob Mcgarrah 6,000 *
John P Mcgonigle 300 *
Mary C Mcgonigle 300 *
James Merriman 16,084 *
Eileen Miller 1,200 *
Harley Miller 5,276 *
Harley & Brook Miller 1,050 *
George W Moffitt Jr 3,375 *
Thomas Molumphy 1,500 *
Molumphy Capital Mgmt (12) 3,000 *
Robert H Montgomery 8,000 *
Mac G Morris 1,500 *
James Mosier 5,867 *
Gary Nash 320 *
Elizabeth L Nelson 13,250 *
Robert F Nemeth 5,000 *
Gregg J Newhuis 20,833 *
Jeffrey M Newhuis 2,100 *
Patrick Nolan 6,812 *
Paul Nordin 1,000 *
Gary Oakland 3,250 *
George O`connell 45,000 *
Robert Padrick 12,000 *
Robert Padrick Trustee Fbo Kellie Nicole Padrick 3,000 *
Robert Padrick Trustee For Robert G Padrick 6,000 *
Michael A Parker 1,000 *
Neil L Parker 1,500 *
Richard & Laura Parker 7,500 *
Joseph Pellegrino 60,000 *
Robert H Potts 3,000 *
Charles W Proctor Iii 125 *
Ernest L Ransome Iii 1,500 *
Harry Renner Iv 12,000 *
John B Rettew Iii 3,500 *
Gardiner Rogers 3,300 *
Marie G Roper 1,500 *
Gerald B Rosenthal 4,000 *
Karl F Rugart 8,250 *
John S Rupp 3,000 *
Valentina Sas 600 *
Edward L Schoenhut 6,000 *
William F Schoenhut Jr 8,000 *
Stephen Schwartz 7,500 *
Mary L Scranton 1,750 *
114
Nicholas Sellers 3,000 *
William Sellers (13) 24,506 899,855 *
Raymond K Shotwell 1,650 *
Leonard H Sichel Jr 3,000 *
Richard Smith 36,000 *
Kathy Smitley 1,250 *
Melvin G Snyder 3,000 *
Terry W Stanglein 10,800 *
Elinor Steinhilber 3,000 *
Michael Steir 2,250 *
Michael & Ellen Steir 1,500 *
Cpt Eric W Stetson 1,500 *
Gertrude T Stevens 4,583 *
Homer N Stewart 3,000 *
Vivian Stroud (14) 1,500 *
Clark D Stull 210 *
Clark D & Carolyn S Stull 6,000 *
George E Szychoski 30 *
Michael W Szychoski 75 *
Constantine Teofil Szymborski 3,000 *
Technology Partners (15) (16) 115,529 *
Alfred & Susan Thompson 826 *
Andrew Thompson 150 *
James Turner 12,000 *
William L Van Alen Jr (17) 6,000 *
David L Weaver 1,260 *
Dwane M Weaver 3,000 *
Marlene Weaver 30,000 *
Michael L Weaver 300 *
Wesley R Weaver 4,266 *
Arthur L Wheeler Acct #216-39u48 39,000 *
Arthur Wiener 970 *
Arthur & Ruth Wiener 3,950 *
J Edward Willard 15,000 *
Kenneth B Wilson 1,500 *
Claudine W Wolfe 733 *
C Edwin & Janet Lyn Wright 1,500 *
John D Wright 3,000 *
Craig Yoshimoto 3,000 *
Joseph Zirbes 1,000 *
Ruth Zweigbaum 3,620 *
Total 1,187,267 (18)
(1) Mr. Boynton is a director of the company.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity Brittain Family
Trust, is E. Douglas Brittain.
(3) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity Delta Western
Company, is George W. Moffitt.
(4) Mr. DeMedio is anemployee of USA.
(5) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity Diligent Finance
co. Ltd., is Rai Hamilton.
(6) Mr. Hamilton is an employee of USA.
(7) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Heald Family
Trust, is Jack Heald.
(8) Mrs. Hepburn is the Director of Public Relaitons of USA.
(9) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Hrubala
Associates, A Partnership, is David R. Molumphy.
(10) Ms. Jenkins in an employee of USA.
(11) Mr. Lurio is a director and his law firm, Lurio & Associates, P.C., is
general counsel to USA.
115
(12) The natural person who exercises sole and/or shares voting or dispositive
powers with respect to the shares held of record by the entity, Molumphy Capital
Mgmt., is David R. Molumphy.
(13) William W. Sellers is a director of USA.
(14) Ms. Stroud is an employee of USA.
(15) The natural person who exercises sole and/or shared voting or dispositive
powers with repect to the shares held of record by the entity, Technology
Partners, is Porter Bibb.
(16) Technology Partners is the Company`s investment banker.
(17) Mr. Vanalen is a director of the company.
(18) Represents 593,633 shares issued at $.20 per share and 593,634 shares
underlying warrants to purchase our shares at $.20 per share at any time through
June 30, 2004. These shares and warrants were issued to our senior note holders
who elected to receive shares in lieu of cash for the December 31, 2002
quarterly interest payment. For each share issued, the holder also received one
warrant. We have agreed to register these shares for resale under the Act at our
cost and expense until December 2004.
116
SENIOR NOTE INTEREST MARCH 2003 COMMON STOCK & WARRANTS
Common Stock & Warrants Beneficial Ownership
Selling Shareholder Offered Hereby After Offering
----------------------- ----------------------- -------------------------
Number Percent
-------------------------
Donald T Aanestad 6,000 *
Vijay Alimachandani 9,000 *
Alan Alpert 1,500 *
John P Ayers 3,000 *
Charles F Bellavia 3,000 *
Nancy & Earl Besch 3,000 *
Gunter J Beyer 3,000 *
Benjamin Lee Bird 3,000 *
Kathlyne K Birdsall 375 *
Joseph Bolitsky 20,000 *
Edwin R Boynton 9,750 *
David G Bray 600 *
Douglas & Carolyn Brittain 6,000 *
Brittain Family Trust (1) 2,000 *
Gordon L Brodine 11,770 *
Michael J Budinetz 3,913 *
Vincent J Calvarese 3,750 *
Julie Carlson 3,000 *
Michael J Chiordi 3,000 *
Gerald E Clark Jr 2,100 *
Diane Cloutier 18,000 *
Roger D Coffey 3,000 *
Marc A Cohen 17,250 *
Cornerstone Public Relations 281 *
Group, M Darlene Herbert Felt *
Jim Cross 1,000 *
William R Crothers 1,876 *
Lorraine Crow 300 *
Clifton B Currin Trust 4,000 *
Benjamin Deacon 750 *
Delta Western Company (2) 11,250 *
Louis E Di Renzo 1,500 *
Diligent Finance Company Ltd (3) 96,000 *
Anees T Din 5,400 *
Leo J Dolan 6,000 *
Robert F Dress 2,200 *
Howard Effron 3,000 *
Bently Elliott 3,000 *
Anthony J Fanelli 3,000 *
John S Foster 20,500 *
Helen K Fox 3,000 *
Samantha Harris Fulmer 300 *
Dorothy Galvin 300 *
Margaret R Geddis 750 *
Robert G Giddens 28,456 *
Frederick F Glockner 300 *
William M Goldstein 9,000 *
Ira Fbo Robert A Hamilton (4) 1,260 *
John E Hamilton 900 *
117
Robert A Hamilton (4) 2,730 *
Peter & Deborah Harris 1,500 *
Andrew B Hebenstreit 11,000 *
Joyce Hodges 1,500 *
Michelle Hollenshead 625 *
James M Holmwood 6,000 *
Hrubala Associates, A Partnership (5) 6,000 *
Gordon F Hudson 6,000 *
Christine F Hughes 750 *
Wendy Jenkins (6) 3,933 *
William Robert Johnston 1,500 *
Charles T Jones 1,500 *
F/B/O Fred Karagosian 3,000 *
Gloria & Fred Karn 300 *
Michael Katchur 2,250 *
Maude Wood Kent 3,000 *
Thomas & Maude Wood Kent 3,000 *
Robert A Kilgore 15,000 *
Shirley K Knerr 2,700 *
Gregory S Kobus 3,000 *
Paul G Lanni 3,000 *
Warren D Lewis 4,750 *
H Mather Lippincott Jr 3,000 *
Anthony F Lopez 3,000 *
Robert Lozowski 600 *
Douglas Lurio (7) 4,500 252,713 *
James P Maccain 8,000 *
Lewis F Madan 600 *
Kathleen J Mason 26,000 *
Barry N Mccabe 3,000 *
Duane C Mccarthy 300 *
G Ellard Mccarthy 1,500 *
Bob Mcgarrah 6,000 *
John P Mcgonigle 300 *
Mary C Mcgonigle 300 *
James F Merriman 16,084 *
Eileen Miller 1,200 *
Harley Miller 5,276 *
Harley & Brook Miller 1,050 *
George W Moffitt Jr 3,375 *
Thomas Molumphy 1,500 *
Molumphy Capital Mgmt (8) 3,000 *
Robert H Montgomery 8,000 *
Mac G Morris 1,500 *
James Mosier 5,867 *
Gary Nash 320 *
Elizabeth L Nelson 10,250 *
Robert F Nemeth 5,000 *
Gregg J Newhuis 20,833 *
Jeffrey M Newhuis 2,100 *
Patrick Nolan 6,812 *
Paul Nordin 1,000 *
Gary Oakland 3,250 *
George O`connell 45,000 *
Oldom & Co 3,000 *
Robert Padrick 12,000 *
Robert Padrick Trustee Fbo Kellie Nicole Padrick 3,000 *
Robert Padrick Trustee For Robert G Padrick 6,000 *
Michael A Parker 1,000 *
Neil L Parker 1,500 *
Richard & Laura Parker 7,500 *
Joseph Pellegrino 60,000 *
Robert H Potts 3,000 *
118
Charles W Proctor Iii 125 *
Ernest L Ransome Iii 1,500 *
Harry Renner Iv 12,000 *
John B Rettew Iii 3,500 *
Gardiner Rogers 3,300 *
Marie G Roper 1,500 *
Gerald B Rosenthal 4,000 *
Karl F Rugart 8,250 *
John S Rupp 3,000 *
Valentina Sas 600 *
Edward L Schoenhut 6,000 *
William F Schoenhut Jr 8,000 *
Stephen Schwartz 7,500 *
Mary L Scranton 1,750 *
Nicholas Sellers 3,000 *
Raymond K Shotwell 1,650 *
Leonard H Sichel Jr 3,000 *
Richard Smith 36,000 *
Kathy Smitley 1,250 *
Terry W Stanglein 10,800 *
Elinor Steinhilber 3,000 *
Michael Steir 2,250 *
Michael & Ellen Steir 1,500 *
Cpt Eric W Stetson 1,500 *
Gertrude T Stevens 4,583 *
Homer N Stewart 3,000 *
Vivian Stroud (9) 1,500 *
George E Szychoski 30 *
Michael W Szychoski 75 *
Constantine Teofil Szymborski 3,000 *
Technology Partners (10) (11) 115,529 *
Alfred Hunter & Susan Thompson 826 *
Andrew Thompson 150 *
James Turner 12,000 *
William L Van Alen Jr (12) 6,000 268,005 *
David L Weaver 1,260 *
Dwane M Weaver 3,000 *
Marlene Weaver 30,000 *
Michael L Weaver 300 *
Wesley R Weaver 4,266 *
Arthur L Wheeler Acct #216-39u48 39,000 *
Arthur Wiener 970 *
Arthur & Ruth Wiener 3,950 *
J Edward Willard 15,000 *
Kenneth B Wilson 1,500 *
Claudine W Wolfe 733 *
C Edwin & Janet Lyn Wright 1,500 *
John D Wright 3,000 *
Craig Yoshimoto 3,000 *
Joseph Zirbes 1,000 *
Ruth Zweigbaum 3,620 *
Total 1,102,655 (13)
119
(1) The natural person who exercises sole and/or shared voting or dispositive powers with respect to
shares held of record by the entity, Brittain Family Trust, is E. Douglas Brittain.
(2) The natural person who exercises sole and/or shared voting or dispositive powers with respect to
shares held of record by the entity, Delta Western Company, is George W. Moffitt.
(3) The natural person who exercises sole and/or shared voting or dispositive powers with respect to
shares held of record by the entity, Diligent Finance Company Ltd., is Rai Hamilton.
(4) Mr. Hamilton is an employee of USA.
(5) The natural person who exercises sole and/or shared voting or dispositive powers with respect to
shares held of record by the entity, Hrubala Associates, A Partnership, is David R. Molumphy.
(6) Ms. Jenkins is an employee of USA.
(7) Mr. Lurio is a director and his law firm, Lurio & Associates, P.C., is general counsel to USA.
(8) The natural person who exercises sole and/or shared voting or dispositive powers with respect to
shares held of record by the entity, Molumphy Capital Mgmt., is David R. Molumphy.
(9) Ms. Stroud is an employee of USA.
(10) The natural person who exercises sole and/or shared voting or dispositive powers with respect to
shares held of record by the entity, Technology Partners, is Porter Bibb.
(11) Technology Partners is the Company`s investment banker.
(12) Mr. VanAlen is a director of the Company.
(13) Represents 551,327 shares issued at $.20 per share and 551,328 shares
underlying warrants to purchase our shares at $.20 per share at any time through
June 30, 2004. These shares and warrants were issued to our senior note holders
who elected to receive shares in lieu of cash for the March 31, 2003 quarterly
interest payment. For each share issued, the holder also received one warrant.
We have agreed to register these shares for resale under the Act at our cost and
expense until March 2005.
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MARKET FOR COMMON STOCK
The Common Stock is currently traded on the OTC Electronic Bulletin Board
under the symbol USTT.
The high and low bid prices on the OTC Electronic Bulletin Board for the
Common Stock were as follows:
FISCAL
------
2001 HIGH LOW
---- ---- ---
First Quarter (through September 30, 2000) $ 1.75 $0.91
Second Quarter (through December 31, 2000) $ 1.78 $0.66
Third Quarter (through March 31, 2001) $ 1.78 $0.88
Fourth Quarter (through June 30, 2001) $ 1.28 $0.74
2002
----
First Quarter (through September 30, 2001) $ 1.05 $ 0.60
Second Quarter (through December 31, 2001) $ 0.74 $ 0.34
Third Quarter (through March 31, 2002) $ 0.80 $ 0.39
Fourth Quarter (through June 30, 2002) $ 0.41 $ 0.20
2003
----
First Quarter (through September 30, 2002) $ 0.39 $ 0.15
Second Quarter (through December 31, 2002) $ 0.23 $ 0.14
Third Quarter (through March 31, 2003) $ 0.22 $ 0.16
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
At December 31, 2002, there are 3,317,485 shares of Common Stock issuable
upon exercise of outstanding options. The following table shows the number of
options outstanding and their exercise price:
OPTION
OPTIONS OUTSTANDING EXERCISE PRICE
------------------- --------------
2,475,318 $ .165
550,000 $ .70
125,000 $ 1.00
52,000 $ 1.50
41,167 $ 2.00
74,000 $ 2.50
-------------------
3,317,485
The Company has registered for resale under the 1933 Act all of the
Common Stock underlying the options. All of the aforesaid options have been
issued by the Company to employees, Directors, officers or consultants.
As of December 31, 2002, the following Warrants were outstanding:
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2,500 1998-A Warrants;
5,000 1998-B Warrants;
725,000 consultant warrants;
1,580,828 Swartz Private Equity, LLC warrants;
2,606,100 2001-B Warrants;
192,017 2001-C Warrants
100,000 GEMA Warrants;
1,426,787 Warrants associated with Stock for interest;
15,545,897 2002-A Warrants;
22,035,716 investor warrants
-----------------
44,219,845 Total
The Company has registered for resale under the 1933 Act all of the
Common Stock underlying these warrants (other than those underlying the
GEMA Warrants and the Warrants associated with Stock for interest).
As of December 31, 2002 there are $13,738,450 face value of
Senior Notes outstanding which are convertible into 35,943,203 shares
of Common Stock.
On December 31, 2002 there were 1,028 record holders of the Common Stock
and 573 record holders of the Preferred Stock.
The holders of the Common Stock are entitled to receive such dividends as
the Board of Directors of the Company may from time to time declare out of funds
legally available for payment of dividends. Through the date hereof, no cash
dividends have been declared on the Company`s securities. No dividend may be
paid on the Common Stock until all accumulated and unpaid dividends on the
Preferred Stock has been paid. As of December 31, 2002, such accumulated
unpaid dividends amount to $5,570,963.
During fiscal year 2002, certain holders of the Company`s Preferred Stock
converted 26,002 shares into 26,002 shares of Common Stock. Certain of these
shareholders also converted cumulative preferred dividends of $268,140 into
26,814 shares of Common Stock. During the six months ended December 31, 2002,
150 shares of the Company`s Preferred Stock were converted into 150 shares of
Common Stock, and $1,570 of Cumulative preferred dividends were converted into
157 shares of Common Stock.
As of December 31, 2002, there were 529,132 shares of Common Stock
issuable upon conversion of the outstanding Preferred Stock and 557,096 shares
issuable upon the conversion of cumulative Preferred Dividends, which when and
If issued would be freely tradeable under the Act.
During the quarter ended June 30, 2002, the following issuances of Common
Stock were authorized: 11,507 shares from the conversion of Preferred Stock;
12,007 shares from the conversion of cumulative Preferred dividends; 334,168
from the exercise of Warrants; 61,728 shares from the conversion of Convertible
Debentures and 617,280 shares from the related exercise of Warrants; 390,000
shares in exchange for professional services; 300,882 shares in lieu of interest
on the 12% convertible Notes; 1,250,000 shares to Officers as compensation; and
23,637,341 shares issued in connection with the acquisition of Stitch Networks
Corporation (See Note 3 to the Consolidated Financial Statements).
Subsequent to June 30, 2002 and through December 31, 2002, the following
equity activity occurred:
During September 2002, the Company sold 2,000,000 shares of restricted
Common Stock at $.12 per share for aggregate proceeds of $240,000 to an
investor. In addition, in October 2002, the Company granted to the investor
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warrants to purchase up to 2,000,000 shares at $.10 per share through November
30, 2002, and if all of these warrants are exercised, the investor has been
granted another identical warrant for 2,000,000 shares exercisable at any time
through March 31, 2003.
The Company had received signed subscription documents for the 2002-A
Private Placement of Senior Notes for approximately $3.84 million subsequent to
July 1, 2002. In total, total proceeds of $4,284,000 have been received, of
which $2,585,000 has been deposited and the remainder of $1,699, 000 was for
services. A total of $1,329,800 are for services to be performed and are
therefore reflected as prepaid professional fees at December 31, 2002.
La Jolla Cove Investors has converted Debentures and exercised warrants.
The investor utilized previously remitted funds to the Company which was
reflected as a deposit in the June 30, 2002 consolidated financial statements.
Through December 31, 2002, La Jolla converted $133, 000 of 9 3/4 percent
Convertible Debentures, for which the Company issued 829,099 shares of stock,
and exercised 8,290,990 warrants to purchase Common Stock at an average price of
$.16 per share. The Company had previously executed a Securities Purchase
Agreement with La Jolla for the purchase of $225,000 (increased by $100,000 on
June 18, 2002) of Convertible Debentures bearing 9 3/4 percent interest with a
maturity date of August 3, 2003 (extended to August 2, 2004 on June 18, 2002).
Interest is payable by the Company monthly in arrears. The Debenture is
convertible at any time after the earlier of the effectiveness of the
registration statement or 90 days following issuance, at the lower of $1.00 per
share or 80% (later lowered to 72%) of the lowest closing bid price of the
Common Stock during the 30 days preceding exercise. See "Management`s Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
In July 2002 the Company agreed to issue an aggregate of 234,600 shares to
employees as part of those employees` severance payments. The shares were issued
At $.25 per share, the fair value on the date of issue.
In July 2002, the Company agreed to issue to Karl Mynyk, a former employee,
an aggregate of 125,000 shares in settlement of litigation between he and the
Company. The shares were valued at $.20 per share, the fair value on the date of
issuance. We have agreed to register these shares for resale under the Act at
our cost and expense.
In October 2002, the Company issued 529,324 shares (valued at $.20 per
Share) to the holders of the senior notes in lieu of the cash quarterly interest
payments due for the quarter ended September 30, 2002. In addition, the Company
granted warrants to purchase up to 529,324 shares at $.20 per share at any time
prior to December 31, 2004.
For the quarter ended December 31, 2002, the Company issued 593,634 shares
(valued at $.20 per share) to the holders of the senior notes in lieu of the
cash quarterly interest payments due for the quarter. In addition, the Company
granted warrants to purchase up to 593,634 shares at $.20 per share at any time
prior to December 31, 2004.
In October 2002, the Company issued to Edwin P. Boynton 50,000 shares of
Common Stock. In April 2002, The Company had granted him 100,000 options to
purchase Common Stock at $.40 per share, which was equal to or greater than the
closing bid price of the Common Stock on the date of the grant. Subsequent to
July 1, 2002, up to half of these options were permitted to convert to shares.
123
In October 2002, the Company sold to an investor 3,571,429 shares at $.07
per share and issued the following warrants: (1) warrants to purchase up to
7,142,858 shares at $.07 at any time for a five year period; and (2) warrants to
Purchase up to 7,142,858 shares, at $.07 per share and up to 5,000,000 shares at
$.10 per share, exercisable over a one-year period. We have agreed to register
these shares for resale under the Act at our cost and expense.
In October 2002, the Company sold to an investor 1,500,000 shares of
restricted common stock at $.10 per share and granted warrants to purchase up to
750,000 shares at $.15 per share at any time for five years. Within seven days
following the effectiveness of the registration statement covering these shares,
the Company has agreed to Sell to the investor an additional 1,500,000 shares at
$.10 per share and grant Warrants to purchase up to 750,000 shares at the then
closing price per share at any time for five years. We have agreed to register
these shares for resale under the Act at our cost and expense.
In October 2002, the Company granted to the holders of the 12% senior notes
warrants purchasing that number of shares equal to 75% of the dollar amount of
the notes held by such holder. The total number of warrants was 10,360,025 and
are exercisable at any time prior to November 30, 2002 (later extended to April
30, 2003). If the holder exercises all of such holder`s warrants, the holder
shall receive another identical Warrant exercisable at any time prior to April
30, 2003. We have agreed to register these shares for resale under the Act at
our cost and expense. Through December 31, 2002, the note holders exercised
5,080,261 Common Stock warrants. As a result, an additional 5,080,261 Common
Stock warrants were granted, of which 291,376 were exercised as of December 31,
2002.
In November 2002, the Company agreed to issue an aggregate of 1,480,000
shares to employees and consultants for services to be rendered. The shares were
valued at $.16 per share.
In November 2002 and through December 31, 2002, 715,000 shares of Common
Stock were sold at $.10 per share in the 2003-A offering.
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DESCRIPTION OF SECURITIES
General
We are authorized to issue up to 300,000,000 shares of common stock, no par
value, and 1,800,000 shares of undesignated preferred stock. As of the date
hereof, 900,000 preferred shares have been designated as series A convertible
preferred stock, no par value. As of December 31, 2002, there were 99,096,167
shares of common stock issued and outstanding and 529,132 shares of series A
preferred stock issued and outstanding which are convertible into 529,132 shares
of common stock. Through December 31, 2002, a total of 582,018 shares of
preferred stock have been converted into 658,462 shares of common stock and
$2,621, 924 of accrued and unpaid dividends thereon have been converted into
282,369 shares of common stock.
La Jolla Debenture and Warrants
During July 2001, the Company issued to La Jolla Cove Investors, Inc. a
warrant to purchase up to 500,000 shares of Common Stock. The warrant can be
exercised at any time in whole or in part within one year following the
effectiveness of the registration statement covering the resale of the shares
issuable upon exercise of the warrant. The exercise price of the warrant is the
125
lower of $1.00 or 80% of the lowest closing bid price of the Common Stock during
the 20 trading days prior to exercise. The Company has agreed to prepare and
file at its cost and expense a registration statement covering the resale by La
Jolla of the shares underlying the warrant. At the time of the issuance of the
warrant, La Jolla paid to the Company a non-refundable fee of $50,000 to be
credited towards the exercise price under the warrant. A broker-dealer received
a commission of $2,100 in connection with this warrant. During the quarter ended
December 31, 2001, La Jolla exercised all of these warrants for a cash payment
of approximately $.29 per share.
During August 2001, the Company issued to La Jolla a $225,000 Convertible
Debenture (increased by $100,000 on June 18, 2002) bearing 9 3/4 percent
interest with a maturity date of August 2, 2003 (extended to August 2, 2004).
Interest is payable by the Company monthly in arrears. The Debenture is
convertible at the lower of $1.00 per share or 80% (later reduced to 72%) of the
lowest closing bid price of the Common Stock during the 20 days (changed to 270
calendar days) preceding exercise. If on the date of conversion the closing bid
price of the shares is $.40 or below, the Company shall have the right to prepay
the portion being converted at 150% of the principal amount being converted. In
such event, La Jolla shall have the right to withdraw its conversion notice. At
the time of conversion of the Debenture, the Company has agreed to issue to La
Jolla warrants to purchase an amount of Common Stock equal to ten times the
number of shares actually issued upon conversion of the Debenture. The warrants
are exercisable at any time for two years following issuance and at the related
conversion price of the Debenture. The Company has agreed to prepare and file at
its expense a registration statement covering the resale of the shares of Common
Stock underlying the Debenture as well as the related warrants issuable upon
conversion of the Debenture. From inception through December 31, 2002, La Jolla
converted $133,000 of 9 3/4 percent Convertible Debentures, for which the
Company issued 829,099 shares of stock, and exercised 8,290,990 warrants to
purchase Common Stock at an average price of $.16 per share.
In March 2003, we issued to La Jolla a warrant to purchase up to 9,000,000
of our shares at $.10 per share. Of such warrants, 3,000,000 expire three months
after the date hereof, 3,000,000 expire six months after the date hereof, and
the remaining 3,000,000 expire nine months after the date of this prospectus. We
have agreed to register all of the shares underlying these warrants for resale
by La Jolla for a one year period.
Common Stock
The holder of each share of common stock:
o is entitled to one vote on all matters submitted to a vote of the
shareholders of USA, including the election of directors. There is no
cumulative voting for directors;
o does not have any preemptive rights to subscribe for or purchase
shares, obligations, warrants, or other securities of USA; and
o is entitled to receive such dividends as the Board of Directors may
from time to time declare out of funds legally available for payment
of dividends.
No dividend may be paid on the common stock until all accumulated and
unpaid dividends on the series A preferred stock have been paid. Upon any
liquidation, dissolution or winding up of USA, holders of shares of common stock
are entitled to receive pro rata all of the assets of USA available for
distribution, subject to the liquidation preference of the series A preferred
stock of $10.00 per share and any unpaid and accumulated dividends on the series
A preferred stock.
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Series A Convertible Preferred Stock
The holders of shares of Series A preferred stock:
o have the number of votes per share equal to the number of shares of
common stock into which each such share is convertible (i.e., 1 share
of series A preferred stock equals 1 vote);
o are entitled to vote on all matters submitted to the vote of the
shareholders of USA, including the election of directors; and
o are entitled to an annual cumulative cash dividend of $1.50 per annum,
payable when, as and if declared by the Board of Directors.
The record dates for payment of dividends on the series A preferred stock
are February 1 and August 1 of each year. Any and all accumulated and unpaid
cash dividends on the series A preferred stock must be declared and paid prior
to the declaration and payment of any dividends on the common stock. Any unpaid
and accumulated dividends will not bear interest. As of December 31, 2002 the
accumulated and unpaid dividends were $5,570,963.
Each share of series A preferred stock is convertible at any time into 1
share of fully issued and non-assessable common stock. Accrued and unpaid
dividends earned on shares of series A preferred stock being converted into
common stock are also convertible into common stock at the rate $10.00 per share
of common stock at the time of conversion and whether or not such dividends have
then been declared by USA. As of December 31, 2002 a total of 582,018 shares
of series A preferred stock have been converted into common stock and accrued
and unpaid dividends thereon have been converted into 282,369 shares of
common stock. The conversion rate of the series A preferred stock (and any
accrued and unpaid dividends thereon) will be equitably adjusted for stock
splits, stock combinations, recapitalizations, and in connection with certain
other issuances of common stock by USA. Upon any liquidation, dissolution, or
winding-up of USA, the holders of series A preferred stock are entitled to
receive a distribution in preference to the common stock in the amount of $10.00
per share plus any accumulated and unpaid dividends.
We have the right, at any time, to redeem all or any part of the issued and
outstanding series A preferred stock for the sum of $11.00 per share plus any
and all unpaid and accumulated dividends thereon. Upon notice by USA of such
call, the holders of the series A preferred stock so called will have the
opportunity to convert their shares and any unpaid and accumulated dividends
thereon into shares of common stock. The $11.00 per share figure was the
redemption price approved by the Directors and shareholders of USA at the time
the series A preferred stock was created and first issued. We currently have no
plans to redeem the preferred stock.
12% Senior Notes
As of December 31, 2002, we have outstanding $4,061,950 of Senior Notes
due December 31, 2005, $4,642,500 of Senior Notes due December 31, 2004, and
$5,034,000 of Senior Notes due December 31, 2003. The principal amount of each
senior note which is not voluntarily converted shall be payable on the maturity
date thereof, at which time any unpaid and accrued interest shall also become
due. Interest shall accrue at the rate of 12% per annum from and after the date
of issuance and shall be payable quarterly in arrears on December 31, March 31,
June 30, and September 30 of each year until December 31, 2004. The senior notes
are senior to all existing equity securities of USA, including the series A
preferred stock.
127
Of the senior notes due December 31, 2003, a total of $3,823,000 were
purchased through the exchange of $3,823,000 of the old senior notes previously
due December 31, 2001. The principal amount of these notes is convertible at any
time into shares of common stock at the rate of $1.25 per share. The interest
paid on these notes is also convertible into shares of common stock at the rate
of $1.00 per share. For the quarters ended September 31, 2001 and December 31,
2001, the conversion rate was reduced to $.50 per share and for the quarter
ended March 31, 2002 to $.40 per share and for the quarters ended September 30,
2002, December 31, 2002 and March 31, 2003, to $.20 per share together with one
warrant at $.20 per share for each share issued with an exercise termination
date of June 30, 2004. We have agreed to register these shares as well as the
shares underlying the warrants for resale under the Act. In March 2003, each
holder of these senior notes was granted the option to have the conversion rate
reduced to $.20 in exchange for extending the maturity date for three additional
years. As of April 7, 2003, a total of $1.7 million of these notes have been
extended to December 31, 2006.
The principal amount of each senior note due December 31, 2004 is
convertible at any time into shares of Common Stock at the rate of $.40 per
share. In January 2002, the Company agreed to provide the option to each holder
of these senior notes to elect to accept shares in lieu of receiving cash in
satisfaction of the interest payments otherwise due to them on account of the
last three quarters of fiscal 2002. The conversion rate for this interest
payment due for the quarter ended March 31, 2002 was $.40 per share. The Company
continued this option at $.20 per share for the quarters ended September 30,
2002, December 31, 2002 and March 31, 2003 together with one warrant at $.20 for
each share issued with an exercise termination date of June 30, 2004. We have
agreed to register these shares as well as the shares underlying the warrants
for resale under the Act. In March 2003, each holder of these senior notes was
granted the option to have the conversion rate reduced to $.20 in exchange for
extending the maturity date for three additional years. As of April 7, 2003,
a total of $2.1 million of these notes have been extended to December 31, 2007.
The principal amount of each Senior Note due December 31, 2005 is
convertible at any time into shares of Common Stock at the rate of $.20 per
share. The Company agreed to provide the option to each holder of these senior
notes to elect to accept shares in lieu of receiving cash in satisfaction of the
interest payments otherwise due to them on account of the last quarter of fiscal
2002 at the rate of $.20 per share. The Company continued this option at $.20
per share for the quarters ended September 30, 2002, December 31, 2002 and March
31, 2003 together with one warrant at $.20 for each share issued with an
exercise termination date of June 30, 2004. We have agreed to register these
shares as well as the shares underlying the warrants for resale under the Act.
The indebtedness evidenced in the Senior Note is subordinated to the prior
payment when due of the principal of, premium, if any, and interest on all
"Senior Indebtedness", as defined herein, of USA as follows: Upon any
distribution of its assets in a liquidation or dissolution of USA, or in
bankruptcy, reorganization, insolvency, receivership or similar proceedings
relating to USA, the Lender shall not be entitled to receive payment until the
holders of Senior Indebtedness are paid in full. Until a payment default occurs
with respect to any Senior Indebtedness, all payments of principal and interest
due to Lender under the senior note shall be made in accordance with this senior
note. Upon the occurrence of any payment default with respect to any Senior
Indebtedness then, upon written notice thereof to USA and Lender by any holder
of such Senior Indebtedness or its representative, no payments of principal or
interest on the senior note shall be made by USA until such payment default has
been cured to the satisfaction of the holder of such Senior Indebtedness or
waived by such holder, provided, however, that if during the 180 day period
following such default, the holder of Senior Indebtedness has not accelerated
its loan, commenced foreclosure proceedings or otherwise undertaken to act on
such default, then USA shall be required to continue making payments under the
senior note, including any which had not been paid during such 180 day period.
In the event that any institutional lender to USA at any time so requires, the
Lender shall execute, upon request of USA, any intercreditor or subordination
agreement(s) with any such institutional lender on terms not materially more
adverse to the Lender then the subordination terms contained in this senior
note.
128
The term "Senior Indebtedness" shall mean (a) all direct or indirect,
contingent or certain indebtedness of any type, kind or nature (present or
future) created, incurred or assumed by USA with respect to any future bank or
other financial institutional indebtedness of USA or (b) any indebtedness
created, incurred, or assumed, by USA secured by a lien on any of our assets.
Notwithstanding anything herein to the contrary, Senior Indebtedness does
not include:
o unsecured accounts payable to trade creditors of USA incurred in the
ordinary course of business;
o any debt owed by USA to any officer, director or stockholder of USA;
o any obligation of Borrower issued or contracted for as payment in
consideration of the purchase by USA of the capital stock or
substantially all of the assets of another person or in consideration
for the merger or consolidation with respect to which USA was a party;
o any operating lease obligations of USA;
o any other indebtedness which by its terms is subordinated to the
senior note; or
o any "other indebtedness" which is subordinated to all indebtedness to
which the senior note is subordinated in substantially like terms as
the senior note; which such "other indebtedness" shall be treated as
equal with the indebtedness evidenced by the senior note.
Common Stock Purchase Warrants
o Each 2001-B warrant entitles its holder to immediately purchase one
share for $.50 subject to reduction at any time. One-half of each
holder`s warrants were exercisable at any time prior to December 31,
2001 and the balance at any time prior to June 30, 2002 (or such later
date as may be determined by USA).In June 2002, the termination date
of 3,676,829 of these warrants was extended to December 2002 (later
extended until April 30, 2003), and the exercise price of these
warrants reduced to $.10. As of December 31, 2002, 2,606,100 of these
warrants are outstanding. These warrants were acquired from us by the
selling shareholders in 2001 pursuant to a private placement offering.
We have agreed to register these shares under the Act for resale.
o Each 2001-C warrant entitles its holder to immediately purchase one
share for $.50 subject to reduction at any time. Each warrant expires
on April 30, 2002. In June 2003, the termination date of 294,334 of
these warrants was extended to December 2002 (later extended until
April 30, 2003), and the exercise price of these warrants reduced to
$.10. As of December 31, 2002, 192,017 of these warrants are
outstanding. These warrants were acquired from us by the selling
shareholders in 2001 pursuant to a private placement offering. We have
agreed to register these shares under the Act for resale.
o Each 1998-B warrant entitles its holder to immediately purchase one
share of common stock. The exercise price is $4.00 per share, subject
to reduction at any time by USA. The 1998-B warrants are exercisable
at any time prior to August 17, 2003, or such later date as may be
determined by USA. These warrants were acquired from us by the selling
shareholders in 1998 pursuant to a private placement offering. We have
agreed to register the shares underlying the warrants for resale under
the Act until August 2005.
The warrants have been issued pursuant to warrant agreements by and between
USA and American Stock Transfer & Trust Company, the warrant agent.
We have registered for resale the common stock underlying the above
warrants under the Act.
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The exercise price of the warrants and the number of shares of common stock
issuable upon exercise of the warrants are subject to adjustment in certain
circumstances, including a stock split of, stock dividend on, or a subdivision,
combination or recapitalization of the common stock. Upon the merger,
consolidation, sale of substantially all the assets of USA, or other similar
transaction, the warrant holders shall, at the option of USA, be required to
exercise the warrants immediately prior to the closing of the transaction, or
such warrants shall automatically expire. Upon such exercise, the warrant
holders shall participate on the same basis as the holders of common stock in
connection with the transaction.
The warrants do not confer upon the holder any voting or any other rights
of a shareholder of USA. Upon notice to the warrant holders, USA has the right,
at any time and from time to time, to reduce the exercise price or to extend the
warrant termination date.
Shares Eligible for Future Sale
Of the 99,096,167 shares of common stock issued and outstanding on December
31, 2002, 73,792,502 are freely transferable without registration under the Act
(other than shares held by "affiliates" of USA). As of the date hereof, there
were 529,132 shares of preferred stock issued and outstanding, all of which are
freely transferable without further registration under the Act (other than
shares held by "affiliates" of USA).
The shares of preferred stock issued and outstanding as of the date hereof,
are convertible into 529,132 shares of common stock all of which would be
fully transferrable without further registration under the Act (other than
shares held by "affiliates" of USA).
Shares of our common stock which are not freely tradeable under the Act are
known as "Restricted Securities" and cannot be resold without registration under
the Act or pursuant to Rule 144 promulgated thereunder.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including any affiliate of USA, who
beneficially owns "restricted securities" for a period of at least one year is
entitled to sell within any three-month period, shares equal in number to the
greater of (i) 1% of the then outstanding shares of the same class of shares, or
(ii) the average weekly trading volume of the same class of shares during the
four calendar weeks preceding the filing of the required notice of sale with the
SEC. The seller must also comply with the notice and manner of sale requirements
of Rule 144, and there must be current public information available about USA.
In addition, any person (or persons whose shares must be aggregated) who is not,
at the time of sale, nor during the preceding three months, an affiliate of the
USA, and who has beneficially owned restricted shares for at least two years,
can sell such shares under Rule 144 without regard to the notice, manner of
sale, public information or the volume limitations described above.
130
Limitation of Liability; Indemnification
As permitted by the Pennsylvania Business Corporation Law of 1988 ("BCL"),
our By-laws provide that Directors will not be personally liable, as such, for
monetary damages for any action taken unless the Director has breached or failed
to perform the duties of a Director under the BCL and the breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. This
limitation of personal liability does not apply to any responsibility or
liability pursuant to any criminal statute, or any liability for the payment of
taxes pursuant to Federal, State or local law. The By-laws also include
provisions for indemnification of our Directors and officers to the fullest
extent permitted by the BCL. Insofar as indemnification for liabilities arising
under the Act may be permitted to Directors, officers and controlling persons of
USA pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our stock and warrants is American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
PLAN OF DISTRIBUTION
The selling shareholders are free to offer and sell the common shares at
such times, in such manner and at such prices as the selling shareholders may
determine. The types of transactions in which the common shares are sold may
include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of common
shares, or a combination of such methods of sale. The sales will be at market
prices prevailing at the time of sale or at negotiated prices. Such transactions
may or may not involve brokers or dealers.
The selling shareholders may effect such transactions by selling common
stock directly to purchasers or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling shareholders. They may
also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The selling shareholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Act in connection with such sales. In such event, any commissions received
by such broker-dealers or agents and profit on the resale of the shares
purchased by them may be deemed to be underwriting discounts under the Act.
131
The selling shareholders also may resell all or a portion of the common
shares in open market transactions in reliance upon Rule 144 under the
Securities and Exchange Act, provided they meet the criteria and conform to the
requirements of such Rule. We have agreed to bear all the expenses (other than
selling commissions) in connection with the registration and sale of the common
stock covered by this prospectus. In some circumstances, we have agreed to
indemnify the selling shareholders against certain losses and liabilities,
including liabilities under the Act.
We have advised the selling shareholders that while they are engaged in a
distribution of the shares included in this prospectus they are required to
comply with Regulation M promulgated under the Securities Exchange Act of 1934,
as amended. With certain exceptions, Regulation M precludes the selling
shareholders, any affiliated purchasers, and any broker-dealer or other person
who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
LEGAL MATTERS
The validity of the common stock has been passed upon for us by Lurio &
Associates, P.C., Philadelphia, Pennsylvania 19103.
EXPERTS
The consolidated financial statements of USA Technologies, Inc. at June 30,
2002 and 2001, and for each of the two years in the period ended June 30, 2002,
and the financial statements of Stitch Networks Corporation at December 31, 2001
and 2000, and for the years then ended appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contains an explanatory
paragraph describing conditions that raise substantial doubt about the Company`s
ability to continue as a going concern as described in Note 2 to the
consolidated financial statements) appearing elsewhere herein, and are included
in reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
132
USA Technologies, Inc.
Consolidated Financial Statements
Years ended June 30, 2002 and 2001
Contents
Report of Independent Auditors F-1
Consolidated Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders` Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Report of Independent Auditors
USA Technologies, Inc.
Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of USA
Technologies, Inc. as of June 30, 2002 and 2001, and the related consolidated
statements of operations, shareholders` equity (deficit), and cash flows for
each of the two years in the period ended June 30, 2002. These financial
statements are the responsibility of the Company`s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USA Technologies,
Inc. at June 30, 2002 and 2001, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended June 30, 2002,
in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming USA
Technologies, Inc. will continue as a going concern. As discussed in Note 2 to
the financial statements, the Company has never been profitable, continues to
incur losses from operations, has continued to require forebearance agreements
on debt obligations, and anticipates that it will require additional debt or
equity financing which may not be readily available. These matters raise
substantial doubt about the Company`s ability to continue as a going concern.
Management`s plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets, or the
amounts and classification of liabilities that might result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 27, 2002
F-1
USA Technologies, Inc.
Consolidated Balance Sheets
June 30 December 31
2002 2001 2002
---------------------------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 557,970 $ 817,570 $ 517,809
Accounts receivable, less allowance for uncollectible
accounts of $55,555 (unaudited) at December 31, 2002
and $37,000 and $28,000 at June 30, 2002 and 2001,
respectively 340,293 64,752 422,604
Inventory 877,814 560,410 742,615
Prepaid expenses and other current assets 124,865 428,825 182,915
Prepaid professional fees - - $1,566,600
Subscriptions receivable 35,000 29,000 276,000
---------------------------- -----------
Total current assets 1,935,942 1,900,557 3,708,543
Property and equipment, net 1,932,427 761,324 1,676,248
Software development costs, at cost, less accumulated
amortization of $3,578,531 (unaudited) at
December 31, 2002 and $2,995,979 and $0 at
June 30, 2002 and 2001, respectively 2,330,207 3,087,415 1,747,655
Goodwill 6,800,827 - 6,800,827
Intangibles, less accumulated amortization of $182,500
(unaudited) at December 31, 2002 and $36,500 at
June 30, 2002 2,883,500 - 2,737,500
Other assets 29,117 430,765 19,257
---------------------------- -----------
Total assets $ 15,912,020 $ 6,180,061 $ 16,690,030
============================ ===========
Liabilities and shareholders` equity (deficit)
Current liabilities:
Accounts payable $ 3,081,495 $ 2,607,570 $ 4,088,023
Accrued expenses 2,131,289 1,355,595 2,156,471
Deposits 480,000 - 120,000
Current obligations under long term debt 850,644 116,231 789,373
Convertible Senior Notes - 211,704 4,533,803
---------------------------- -----------
Total current liabilities 6,543,428 4,291,100 11,687,670
Convertible Senior Notes, less current portion 6,289,825 4,236,281 3,536,672
Long term debt, net of current portion 762,085 53,577 477,008
Convertible debenture 65,543 - 72,530
---------------------------- ----------
Total liabilities 13,660,881 8,580,958 15,773,880
Shareholders` equity (deficit):
Preferred Stock, no par value:
Authorized shares-1,800,000
Series A Convertible Preferred-Authorized shares -
900,000
Issued and outstanding shares-529,132 at December 31,
2002 and 529,282 and 555,284 (unaudited) at
June 30, 2002 and 2001, respectively
(liquidation preference of $10,862,283
(unaudited) at December 31, 2002 and
$10,468,391 at June 30, 2002) 3,749,158 3,933,253 3,748,096
Common Stock, no par value:
Authorized shares-200,000,000 (unaudited) at December
31, 2002, and 150,000,000 (unaudited) and 62,000,000 at
June 30, 2002 and 2001, respectively
Issued and outstanding shares-99,096,167 (unaudited)
at December 31, 2002 and 66,214,188 and 21,450,755 at
June 30, 2002 and 2001, respectively 55,443,750 32,977,922 61,166,858
Subscriptions receivable (149,750) - -
Deferred compensation - (103,000) -
Accumulated deficit (56,792,019) (39,209,072) (63,998,804)
---------------------------- ------------
Total shareholders` equity (deficit) 2,251,139 (2,400,897) 916,150
---------------------------- ------------
Total liabilities and shareholders` equity (deficit) $ 15,912,020 $ 6,180,061 $ 16,690,030
============================ ===========
See accompanying notes.
F-2
USA Technologies, Inc.
Consolidated Statements of Operations
Six months ended
Year ended June 30 December 31,
2002 2001 2002 2001
---------------------------- ----------------------
(Unaudited)
Revenues:
Equipment sales $ 795,938 $ 803,685 $ 572,947 $ 365,106
Product sales 107,857 - 278,880 -
Service and transaction fees 778,906 647,317 657,265 325,523
---------------------------- --------------------------
Total revenues 1,682,701 1,451,002 1,509,092 690,629
Operating expenses:
Cost of sales (including amortization of software
development costs) 3,914,927 816,239 1,339,400 410,031
General and administrative 7,989,651 5,628,014 3,010,751 2,599,442
Compensation 4,654,662 2,966,776 1,684,432 1,729,813
Loss on exchange of debt - 863,000 - -
Depreciation and amortization 440,238 209,646 494,663 163,002
---------------------------- -------------------------
Total operating expenses 16,999,478 10,483,675 6,529,246 4,902,288
---------------------------- ------------------------
(15,316,777) (9,032,673) (5,020,154) (4,211,659)
Other income (expense):
Interest income 15,791 60,034 7,237 6,267
Interest expense:
Coupon or stated rate (966,974) (587,769) (846,605) (336,998)
Non-cash amortization of debt discount (1,513,118) (764,736) (1,345,693) (525,088)
Less: amounts capitalized 492,658 230,000 - 347,166
---------------------------- -----------------------
Total interest expense (1,987,434) (1,122,505) (2,192,298) (514,920)
Other expense (26,387) (40,100) - -
---------------------------- -----------------------
Total other income (expense) (1,998,030) (1,102,571) (2,185,061) (508,653)
---------------------------- -----------------------
Loss before cumulative effect of accounting change (17,314,807) (10,135,244) (7,205,215) (4,720,312)
Cumulative effect of accounting change - (821,000) - -
---------------------------- -----------------------
Net loss (17,314,807) (10,956,244) (7,205,215) (4,720,312)
---------------------------- ------------------------
Cumulative preferred dividends (822,561) (836,541) (396,962) (413,219)
---------------------------- -------------------------
Loss applicable to common shares $(18,137,368) $(11,792,785) $(7,602,177) $(5,133,531)
============================ ============================
Loss per common share (basic and diluted):
Loss before cumulative effect of accounting change
and extraordinary item $ (0.50) $ (0.65) $ (0.10) $ (0.19)
Cumulative effect of accounting change - (0.05) - -
---------------------------- --------------------------
Loss per common share (basic and diluted) $ (0.50) $ (0.70) $ (0.10) $ (0.19)
============================ ============================
Weighted average number of common shares
outstanding (basic and diluted) 35,994,157 16,731,999 79,493,416 27,313,543
============================ ============================
See accompanying notes.
F-3
USA Technologies, Inc.
Consolidated Statements of Shareholders` Equity (Deficit)
Series A
Convertible Common Deferred Accumulated
Preferred Stock Stock Compensation Deficit Total
-----------------------------------------------------------------------------
Balance, June 30, 2000 $ 4,012,266 $24,204,050 $ (206,000) $(28,165,798) $ (155,482)
Conversion of 11,160 shares of Preferred
Stock to 11,160 shares of Common Stock (79,013) 79,013 - - -
Conversion of $87,030 of cumulative
preferred Stock dividends into 8,703 shares of
Common Stock at $10.00 per share - 87,030 - (87,030) -
Issuance of 418,250 shares of Common Stock
to employees as compensation - 474,995 - - 474,995
Compensation expense related to deferred
stock awards - - 103,000 - 103,000
Issuance of 200,000 shares of Common Stock
in exchange for consulting services - 200,000 - - 200,000
Exercise of 2,112,100 Common Stock
warrants at $1.00 per share - 2,112,100 - - 2,112,100
Issuance of 24,000 shares of Common Stock
from the conversion of $35,000 Senior Notes - 28,024 - - 28,024
Issuance of 895,000 shares of Common Stock
at $1.00 per share in connection with
the 2000-B Private Placement, net of offering
costs of $117,849 - 777,151 - - 777,151
Issuance of 450,000 shares of Common Stock
at $1.00 per share in connection with
the 2001-A Private Placement, net of offering
costs of $22,500 - 427,500 - - 427,500
Issuance of 2,669,400 shares of Common Stock
at $0.60 per share in connection
with the 2001-B Private Placement, net of offering
costs of $54,755 - 1,546,885 - - 1,546,885
Issuance of 1,136,300 shares of Common
Stock in connection with the 2000 12%
Convertible Senior Note Offering - 1,215,843 - - 1,215,843
Debt discount relating to beneficial
conversion feature on the 2000 12%
Convertible Notes - 409,104 - - 409,104
Issuance of 121,541 shares of Common Stock
in lieu of cash payment for interest on the
2000 12% Convertible Senior Notes - 114,927 - - 114,927
Issuance of stock options to distributor - 420,000 - - 420,000
Other - 60,300 - - 60,300
Issuance of 29,010 shares of Common Stock
at $1.05 per share in connection with the $20
million equity line Investment Agreement,
net of offering costs of $30,461 - - - - -
Issuance of 1,580,828 Common Stock
commitment warrants in connection with $20
million Equity Line Investment Agreement - - - - -
The cumulative effect of accounting change
related to the beneficial conversion feature
associated with the 1999 Convertible Senior
Notes - 821,000 - - 821,000
Net loss - - - (10,956,244) (10,956,244)
-----------------------------------------------------------------------------
Balance, June 30, 2001 3,933,253 32,977,922 (103,000) (39,209,072) (2,400,897)
F-4
USA Technologies, Inc.
Consolidated Statements of Shareholders` Equity (Deficit)
Series A
Convertible Common Deferred Subscriptions Accumulated
Preferred Stock Stock Compensation Receivable Deficit Total
-------------------------------------------------------------------------------------
Conversion of 26,002 shares of Preferred
Stock to 26,002 shares of Common Stock (184,095) 184,095 - - - -
Conversion of $268,140 of cumulative
Preferred Stock dividends into 26,814 shares of
Common Stock at $10.00 per share - 268,140 - - (268,140) -
Issuance of 2,784,134 shares of Common
Stock in exchange for professional services - 1,330,944 - - - 1,330,944
Issuance of 500,000 Common Stock
Warrants in exchange for professional
services - 115,000 - - - 115,000
Issuance of 2,340,000 shares of Common
Stock to Officers as compensation - 981,000 - - - 981,000
Issuance of 200,000 Common Stock Options
in exchange for professional services - 66,000 - - - 66,000
Issuance of 498,000 shares of Common
Stock from the conversion of $622,500 of
the 2000 12% Senior Notes at $1.25 per
share - 622,500 - - - 622,500
Exercise of 26,667 Common Stock warrants
at $.50 per share - 13,334 - - - 13,334
Exercise of 1,806,862 Common Stock
Warrants at $.10 per share - 180,687 - - - 180,687
Exercise of 500,000 Common Stock
Warrants at $.29 per share, net of offering
costs of $2,100 - 142,900 - - - 142,900
Issuance of 333,678 shares of Common Stock
from the conversion of $82,000 of 9-3/4%
debentures, and the related exercise of
Common Stock Warrants at varying prices per
share to purchase 3,336,780 shares of Common
Stock, net of offering costs of $15,750 - 886,250 - - - 886,250
Issuance of 4,726,040 shares of Common
Stock in connection with the 2001-B Private
Placement, net of offering costs of $259,672 - 2,754,371 - - - 2,754,371
Issuance of 4,046,684 shares of Common
Stock in Connection with the 2001-C Private
Placement, net of offering costs of $84,272 - 1,992,852 - (149,750) - 1,843,102
Issuance of 674,431 shares of Common Stock
in lieu of cash payment for interest
on the Convertible Senior Notes and the
issuance of 303,829 warrants - 301,856 - - - 301,856
Debt discount relating to beneficial conversion
feature on the 2001 12% Senior Notes - 3,742,813 - - - 3,742,813
Debt discount relating to beneficial
conversion feature on the $325,000,
9-3/4% Convertible Debenture - 325,000 - - - 325,000
Issuance of Common Stock in connection
with Stitch acquisition - 7,800,323 - - - 7,800,323
Issuance of Common Stock Options and
Common Stock Warrants in connection with
Stitch acquisition - 729,323 - - - 729,323
Compensation expense related to deferred
stock awards - - 103,000 - - 103,000
Other - 28,440 - - - 28,440
Net loss - - - (17,314,807) (17,314,807)
----------------------------------------------------------------------------------
Balance, June 30, 2002 $ 3,749,158 $55,443,750 $ - S (149,750) $(56,792,019) $2,251,139
Series A
Convertible
Preferred Stock Common Subscriptions Accumulated
Stock Receivable Deficit Total
----------------------------------------------------------------------------------
Conversion of 150 shares of Convertible
Preferred Stock to 150 shares of Common
Stock (Unaudited) (1,062) 1,062 - - -
Conversion of $1,570 cumulative preferred Stock
dividends into 157 shares of Common Stock
at $10.00 per share (Unaudited) - 1,570 - (1,570) -
Exercise of 6,281,579 Common Stock
warrants at $0.10 per share (Unaudited) - 628,158 - - 628,158
Issuance of 1,110,465 shares of Common
Stock from the conversion of $222,058 of
the 2002-A 12% Senior Notes (Unaudited) - 222,058 - - 222,058
Issuance of 495,421 shares of Common Stock
from conversion of $51,000 of 9-3/4%
debentures, and the related exercise of
Common Stock Warrants to purchase
4,954,210 shares of Common Stock (Unaudited) - 561,000 - - 561,000
Issuance of 2,050,003 shares of Common
Stock in exchange for payroll and
professional services (Unaudited) - 395,008 149,750 - 544,758
Issuance of 2,000,000 shares of Common
Stock at $0.12 per share (Unaudited) - 240,000 - - 240,000
Issuance of 1,500,000 shares of Common
Stock at $0.10 per share, net of offering
costs (Unaudited) 123,000 - - 123,000
Issuance of 715,000 shares of Common Stock
in connection with the 2003-A Private
Placement Offering at $0.10 per share(Unaudited) - 71,500 - - 71,500
Issuance of 3,571,429 shares of Common
Stock at $0.07 per share, net of offering
costs (Unaudited) - 244,925 - - 244,925
Issuance of 1,122,958 shares of Common
Stock and related Warrants in lieu of
cash payment for interest on the 12%
Convertible Senior Notes (Unaudited) - 318,011 - - 318,011
Debt discount relating to beneficial
conversion feature on the 2002-A 12%
Senior Notes (Unaudited) 1,084,120 - - 1,084,120
Issuance of 8,568,016 shares in connection
with the 2002-A 12% Convertible Senior
Notes (Unaudited) - 1,750,062 - - 1,750,062
Issuance of 337,300 shares of Common Stock
in connection with severance arrangements
(Unaudited) - 78,075 - - 78,075
Other (Unaudited) - 4,559 - 4,559
Net loss (Unaudited) - - - (7,205,215) (7,205,215)
-----------------------------------------------------------------------------
Balance, December 31, 2002 (Unaudited) $ 3,748,096 $ 61,166,858 $ - $ (63,998,804) $ 916,150
=============================================================================
See accompanying notes
F-5
USA Technologies, Inc.
Consolidated Statements of Cash Flows
Six months ended
Year ended June 30 December 31
2002 2001 2002 2001
---------------------------- ------------------------------
(Unaudited)
Operating activities:
Net loss $(17,314,807) $(10,956,244) $ (7,205,215) $(4,720,312)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of accounting change - 821,000 - -
Extraordinary loss on exchange of debt - 863,000 - -
Charges incurred in connection with the
issuance of Common Stock, Common Stock Warrants
and Senior Notes 4,532,533 859,295 171,941 1,914,241
Depreciation 403,738 209,646 348,663 163,002
Amortization 3,032,479 - 728,552 -
Loss on property and equipment 195,722 - - -
Interest amortization relating to Senior Notes and
Convertible Debentures 1,513,118 764,736 1,288,332 525,088
Interest expense on the Senior Notes paid through the
issuance of Common Stock 301,856 114,927 318,011 117,867
Charges incurred in connection with Senior Notes 1,000,085 - 227,246 -
Changes in operating assets and liabilities:
Accounts receivable (232,653) 538,419 (82,311) (74,810)
Inventory (36,642) 345,009 135,199 (187,355)
Prepaid expenses and other assets 774,845 356,757 (48,190) 264,774
Accounts payable (259,627) 1,713,179 1,006,528 108,520
Accrued expenses (44,413) 801,352 25,182 (327,921)
--------------------------- ----------------------------
Net cash used in operating activities (6,133,766) (3,568,924) (3,086,062) (2,216,906)
Investing activities:
Cash acquired in connection with Stitch Acquisition, net of
financing costs 2,278,229 - - -
Purchase of property and equipment (102,917) (380,355) (92,484) (31,770)
Increase in software development costs (2,238,771) (2,938,111) - (1,578,715)
-------------------------- ----------------------------
Net cash used in investing activities (63,459) (3,318,466) (92,484) (1,610,485)
Financing activities:
Net proceeds from the issuance of Common Stock and the exercise of
Common Stock Purchase Warrants and Options 3,912,765 4,834,636 1,657,583 2,715,916
Net repayment of long-term debt (2,533,363) (176,053) (346,348) (51,217)
Collection of subscriptions receivable 29,000 12,199 35,000 24,000
Proceeds from the issuance of convertible debenture 325,000 - - -
Repayment of the Senior Notes (240,000) - - -
Proceeds received the from deposits for future financings 500,000 - - -
Net proceeds from the issuance of the Senior Notes and
Convertible Debentures 3,944,223 1,174,818 1,792,150 558,015
Increase in funds deposited for Senior Notes - - - 895,601
--------------------------- ----------------------------
Net cash provided by financing activities 5,937,625 5,845,600 3,138,385 4,142,315
--------------------------- ----------------------------
Net (decrease)increase in cash and cash equivalents (259,600) (1,041,790) (40,161) 314,924
Cash and cash equivalents at beginning of period 817,570 1,859,360 557,970 817,570
--------------------------- ----------------------------
Cash and cash equivalents at end of period $ 557,970 $ 817,570 $ 517,809 $1,132,494
=========================== ============================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 603,312 $ 472,842 $ 371,972 $ 336,998
=========================== ============================
Issuance of Common Stock options to distributor $ - $ 420,000 $ - $ -
=========================== ============================
Issuance of Common Stock, Common Stock Options and Warrants in
connection with Stitch acquisition $8,529,646 $ - $ - $ -
=========================== ============================
Conversion of Convertible Preferred Stock to Common Stock $ 184,095 $ 79,013 $ 1,062 $ 30,621
=========================== ============================
Conversion of Cumulative Preferred Dividends to Common Stock $ 268,140 $ 87,030 $ 1,570 $ 38,920
=========================== ============================
Prepaid stock expenses through issuance of Common Stock $ - $ 42,000 $ 236,800 $ 557,303
=========================== ============================
Subscriptions receivable $ 35,000 $ 29,000 $ 276,000 $ 781,500
=========================== ============================
Conversion of Senior Notes to Common Stock $ 622,500 $ 28,024 $ 222,058 $ 622,500
=========================== ============================
Six months ended
Year ended June 30 December 31
2002 2001 2002 2001
---------------------------- ------------------------------
(Unaudited)
Transfer of inventory to property and equipment $ - $ 87,561 $ - $ -
=========================== ============================
Capital lease obligations incurred $ - $ 118,207 $ - $ -
=========================== ============================
Beneficial conversion feature related to Senior Notes and
Convertible Debentures $ 4,067,813 $ 409,104 $ 1,084,120 $ 654,948
=========================== ============================
Prepaid stock expense through Issuance of Common Stock $ - $ - $ 236,800 $ 557,303
=========================== ============================
Prepaid Senior Note Issuances $ - $ - $ 1,329,800 $ -
=========================== ============================
Transfer of deposits to debt and equity $ - $ - $ 360,000 $ -
=========================== ============================
Issuance of Common Shares in connection with Senior Note Offering $ - $ - $ 1,750,062 $ -
=========================== ============================
Conversion of Convertible Debenture $ - $ - $ 51,000 $ -
=========================== ============================
See accompanying notes.
F-6
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
1. Business
USA Technologies, Inc., a Pennsylvania corporation (the Company), was
incorporated on January 16, 1992. The Company provides unattended cashless
payment/control systems and associated network and services for the copy, fax,
debit card, smart card personal computer, laundry, and vending industries. The
Company`s devices make available credit and debit card and other payment methods
in connection with the sale of a variety of products and services. The Company`s
customers are principally located in the United States and are comprised of
hotels, chains, consumer package goods companies, information technology and
vending operators.
The Company offers the Business Express and Business Express Limited Service
(LSS) principally to the hospitality industry. The Business Express and Business
Express Limited Service (LSS) combines the Company`s business applications for
computers, copiers and facsimile machines into a business center unit. The
Company has developed its next generation of cashless control/payment systems
(e-Port), which includes capabilities for interactive multimedia and e-commerce,
acceptance of other forms of electronic payments and remote monitoring of host
machine data and is being marketed and sold to operators, distributors and
original equipment manufacturers (OEM) primarily in the vending industry.
The Company`s wholly owned subsidiary, Stitch Networks Corporation (Stitch)
designs and employs embedded connectivity solutions that enable network servers
to monitor and control vending machines and appliances over the internet (Note
3). On December 31, 2000, Stitch executed a Vending Placement, Supply and
Distribution Agreement (the Agreement) with Eastman Kodak Company, Maytag
Corporation and Dixie Narco, Inc., which formed a strategic alliance to market
and execute a national vending program for the sale of one-time use camera and
film products. The initial phase of the Agreement ends December 31, 2003, with
provisions for extensions. The Agreement also provides for exclusivity among the
parties for the term of the Agreement relating to the sale of camera and film
products from vending machines within the Continental United States.
F-7
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies
Basis of Financial Statement Presentation
The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustments to recorded
asset values, principally software development costs, goodwill and other
intangibles, that might be necessary should the Company be unable to continue in
existence. The Company has never been profitable, has incurred losses of $17.3
million and $11.0 million during each of the fiscal years ending June 30, 2002
and 2001, respectively, and losses of $7.2 million (unaudited) during the six
months ended December 31,2002. Cumulative losses from its inception through June
30, 2002 amount to approximately $53.3 million and cumulative losses through
December 31, 2002 amounted to approximately $60.5 million (Unaudited). Losses
are expected to continue throughout fiscal year 2003. Additionally, the Company
has continued to require forbearance agreements on debt obligations (Note 8) and
is in the process of renegotiating the terms of the debt. The Company`s ability
to meet its future obligations is dependent upon the success of its products in
the marketplace and its ability to raise capital, which may not be readily
available, until the Company`s products can generate sufficient operating
revenues. These factors raise doubt about the Company`s ability to continue as a
going concern. Management believes that actions presently being taken will allow
for the Company to continue as a going concern. Such actions include the
generation of revenues from operations, additional private placement offerings,
the exercise of Common Stock purchase warrants and options, and continued
efforts to reduce costs.
Interim Financial Information
The consolidated financial statements and disclosures included herein for the
six months ended December 31, 2002 and 2001 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance with
accounting principles generally accepted in the United States for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six month period
ended December 31, 2002 are not necessarily indicative of the results that may
be expected for the fiscal year ended June 30, 2003.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of
Stitch. All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-8
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
Cash Equivalents
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of a money
market fund and certificates of deposit.
Inventory
Inventory, which principally consists of finished goods, components, and
packaging materials, is stated at the lower of cost (first-in, first-out basis)
or market.
Property and Equipment
Property and equipment is recorded at cost. The straight-line method of
depreciation is used over the estimated useful lives of the related assets.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over fair value of the net assets
acquired from Stitch. Intangible assets include patents ($1,870,000) and
trademarks ($1,050,000) acquired in the Stitch acquisition. Amortization of
these intangibles is computed on the straight-line basis over 10 years.
Amortization expense was $36,500 during the year ended June 30, 2002 and
$146,000 (Unaudited) during the six month period ended December 31, 2002. At
June 30, 2002, the expected amortization of the intangible assets is as follows:
$292,000 per year in fiscal year 2003 through fiscal year 2011, and $255,500 in
fiscal year 2012.
Concentration of Credit Risk
Financial instruments that subject the Company to a concentration of credit risk
consist principally of cash and cash equivalents and accounts receivable. The
Company maintains cash and cash equivalents with various financial institutions.
The Company performs periodic evaluations of the relative credit standing of
those financial institutions, and the Company`s policy is designed to limit
exposure to any one institution. The Company does not require collateral or
other security to support credit sales, but provides an allowance for bad debts
based on historical experience and specifically identified risks. Approximately
41% and 12% respectively of the Company`s accounts receivable and revenues for
the year ended June 30, 2002 is concentrated with one customer. Approximately
14% and 44% (Unaudited) respectively, of the Company`s accounts receiveable and
revenues for the six months ended December 31, 2002, are concentrated with one
customer.
F-9
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
Revenue Recognition
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company`s
cashless payment and control network. Service fees for access to the Company`s
equipment and network services are recognized on a monthly basis. Product
revenues are recognized from the sale of products from the Company`s vending
machines upon purchase and acceptance by the vending customer.
Software Development Costs
The Company capitalizes software development costs after technological
feasibility of the software is established and through the product`s
availability for general release to the Company`s customers. All costs incurred
in the research and development of new software and costs incurred prior to the
establishment of technological feasibility are expensed as incurred. During May
2000, the Company reached technological feasibility for the development of the
e-Port product and related network and, accordingly, the Company commenced
capitalization of software development costs related to this product. Costs
capitalized were approximately $2,239,000 and $2,938,000 during the years ended
June 30, 2002 and 2001, respectively, which includes capitalized interest of
approximately $493,000 and $230,800, respectively pursuant to SFAS No. 34,
"Capitalization of Interest Costs". Amortization of software development costs
will commence when the product becomes available for general release to
customers. Amortization of software development costs will be calculated as the
greater of the amount computed using (i) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross revenues
of that product or (ii) the straight-line me thod over the remaining estimated
economic life of the product. Amortization of such costs commences when the
product becomes available for general release to its customers. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.
During the fourth quarter of fiscal 2002, the e-Port product and related network
became available for general release to the Company`s customers. During the
fourth quarter of fiscal year 2002, Management performed an evaluation of the
commercial success and preliminary market acceptance of the e-Port product and
related network and as a result of this evaluation the Company wrote down
$2,663,000 of software development costs related to the e-Port and the related
network. The unamortized balance after the impairment charge is being
F-10
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
Software Development Costs (continued)
amortized over an estimated useful life of two years. Amortization expense for
the six months ended December 31, 2002 was $582,552 (unaudited). Amortization
expense during the year ended June 30, 2002, including the above impairment
adjustment of $2,663,000, was $2,996,000. Such amortization is reflected in cost
of sales in the accompanying statements of operations.
Advertising Expense
Advertising expenses for the years ended June 30, 2002 and 2001 were
approximately $429,000 and $88,000, respectively. Advertising expenses for the
six months ended December 31, 2002 and 2001 were approximately $41,000
(unaudited) and $10,000 (unaudited), respectively.
Research and Development Expenses
Research and development expenses are expensed as incurred. Research and
development expenses, which are included in general and administrative and
compensation expenses in the consolidated statements of operations, were
$1,187,000 and $1,260,000 for the years ended June 30, 2002 and 2001,
respectively and $882,000 (unaudited) and $ 155,000_(unaudited) for the six
months ended December 31, 2002 and 2001, respectively.
Accounting for Stock Options
Financial Accounting Standards Board Statement ("SFAS") No. 123, Accounting for
Stock-Based Compensation, provides companies with a choice to follow the
provisions of SFAS 123 in determination of stock-based compensation expense or
to continue with the provisions of Accounting Principles Board Opinion No. 25
("APB 25"). The Company has elected to follow the provisions of APB 25. Under
APB 25, if the exercise price of the Company`s stock options equals or exceeds
the market price of the underlying Common Stock on the date of grant, no
compensation expense is recognized. The effect of applying SFAS 123 to the
Company`s stock-based awards results in net loss and net loss per common share
that are disclosed on a pro forma basis in Note 13.
Loss Per Common Share
Basic earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period.
Diluted earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period
plus the dilutive effect (unless such effect is anti-dilutive) of equity
instruments. No exercise of stock options, purchase rights, stock purchase
warrants, or the conversion of preferred stock,
F-11
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
Loss Per Common Share (continued)
cumulative preferred dividends or Senior Notes was assumed during fiscal 2002 or
2001 because the assumed exercise of these securities would be antidilutive.
Cumulative Effect of Accounting Change
During fiscal year 1999, the Company issued $4,618,000 (as adjusted) of $10,000
principal amount of Senior Notes. The Notes included detachable equity
instruments (see Note 10). During October 1999, the Company added a conversion
feature to the Senior Notes whereby the Senior Notes were immediately
convertible into Common Stock at $2.50 per share at the option of the holder. At
the time of the addition of the conversion feature, the Company determined that,
based on the fair value of the Company`s Common Stock and specified conversion
prices, and, in accordance with the then applicable accounting pronouncements,
these Senior Notes did not contain an embedded conversion feature. In November
2000, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) reached a consensus on Issue 00-27, Application of EITF
Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios to Certain Convertible
Instruments, whereby it was concluded that an issuer should calculate the
intrinsic value of a conversion option using the effective conversion price,
based on the proceeds received allocated to the convertible instrument instead
of the specified conversion prices in the instrument. Issue 00-27 requires
companies to apply the proscribed methodology for computing the beneficial
conversion feature of convertible securities through a cumulative catch-up
accounting change (in the quarter that includes November 2000) for any such
security issued after May 20, 1999, the effective date of EITF 98-5.
Accordingly, the Company recorded a one-time, noncash charge during fiscal year
2001 of $821,000 to record the cumulative effect of an accounting change as
required by the EITF.
Reclassification
During April 2001, the Company granted 6,000,000 fully vested options to a
distributor who was expected to market and distribute the Company`s e-Port (TM)
product in connection with the signing of a five-year distribution agreement.
The $420,000 estimated fair value of the options was amortized as a reduction of
selling, general, and administrative expenses over the term of the distribution
agreement rather than as a reduction of revenues as there were no revenues
generated as a result of this agreement. During the third quarter of fiscal year
2002 and pursuant to EITF 00-18 "Accounting Recognition for
F-12
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
Reclassification (continued)
Certain Transactions Involving Equity Instruments Granted to Other Than
Employees", the Company presented the unamortized balance in other assets, and
reclassified the June 30, 2001 balance from a contra-equity account to other
assets for consistent presentation. During the fourth quarter of fiscal year
2002, the Company determined that this agreement was not expected to generate
any revenues and that there was no future value to this distribution agreement.
Accordingly, the Company wrote off the remaining unamortized balance of $315,000
to selling, general and administrative expense.
Certain amounts in the June 30, 2002 and 2001 consolidated financial statements
have been reclassified to conform with the December 31, 2002 and 2001 unaudited
consolidated financial statements.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, other
current assets, accounts payable and accrued expenses reported in the
consolidated balance sheets equal or approximate fair value due to their short
maturities. The fair value of the Company`s Senior Notes, Debentures, and other
Long-Term Debt approximates book value as such notes are at market rates
currently available to the Company.
Impairment of Long Lived Assets
In accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
reviews its property and equipment and unamortized intangible assets whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. The Company estimates the future cash flows
expected to result from operations and if the sum of the expected undiscounted
future cash flows is less than the carrying amount of the long-lived asset, the
Company recognizes an impairment loss by reducing the unamortized cost of the
long-lived asset to its estimated fair value.
New Accounting Pronouncements
In June 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations", and No. 142, Goodwill and Other Intangible Assets.
Statement No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Statement No. 141 also
includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations completed after June
30, 2001. Statement No. 142 prohibits the amortization of goodwill and
intangible assets with indefinite
F-13
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
New Accounting Pronouncements (continued)
useful lives. Statement No. 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives. As Statement No. 142 is
effective for fiscal years beginning after December 15, 2001, the Company will
adopt the Statement on July 1, 2002. Although the Company did not adopt
Statement No. 142 until fiscal year 2003, the nonamortization provisions of
Statement No. 142 for combinations initiated after June 30, 2001 are applicable
for the Company effective July 1, 2001.
Under Statement No. 142 the Company will test goodwill for impairment during
fiscal year 2003 using the transitional two-step process prescribed in Statement
No. 142. The first step is a screen for potential impairment, while the second
step measures the amount of the impairment, if any. The Company expects to
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of July 1, 2002 in the second quarter of fiscal year
2003. If the first test indicates a potential impairment, the second phase will
be completed to calculate any actual impairment. Any impairment charge resulting
from these transitional impairment tests will be reflected as the cumulative
effect of a change in accounting principle in the first quarter of fiscal year
2003. The Company has completed the transitional test of goodwill as of July 1,
2002, as prescribed in Statement No. 142, during the quarter ended December 31,
2002 using a discounted cash flow analysis. The Company has concluded that there
were no goodwill impairment indicators to be recorded as a result of this
transitional test.
The FASB recently issued Statement No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets, that is applicable to financial statements issued
for fiscal years beginning after December 15, 2001. The FASB`s new rules on
asset impairment supersede FASB Statement 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and portions of
APB Opinion 30, Reporting the Results of Operations. This Standard provides a
single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in the period in
which the losses are incurred, rather than as of the measurement date as
presently required. The provisions of this Standard will be adopted by the
Company on July 1, 2002 and are not expected to have a significant effect on the
Company`s financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 requires gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations
-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 145 is effective for fiscal years beginning after May 15, 2002. Upon
adoption of SFAS No. 145, any gain or loss on extinguishment of debt previously
classified as an extraordinary item in prior periods that does not meet the
criteria of APB Opinion No. 30 for such classification should be reclassified to
conform with the provisions of SFAS No. 145. Accordingly, the $863,000
extraordinary loss on the 2001 exchange of debt (Note 10), has been reclassified
as a loss from continuing operations during fiscal year 2001 in the accompanying
consolidated financial statements.
F-14
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
3. Acquisition of Stitch Networks Corporation
On May 14, 2002, USA Acquisition Corp., a wholly owned subsidiary of the Company
acquired Stitch pursuant to an Agreement and Plan of Merger by and among the
Company, USA Acquisition Corp., Stitch and the stockholders of Stitch. The
Company acquired Stitch to strengthen its position as a provider of wireless
remote monitoring and cashless and mobile commerce solutions and to increase the
Company`s revenue base. These revenues would include product revenues and
monthly service and transaction fees. Additionally the acquisition of the Stitch
technology complemented the revenue and transaction processing revenue Company`s
existing products. Additionally certain Stitch personnel were believed to
possess some key strengths in several disciplines that the Company believed to
be of great value in its plans for growth.
At the close of the transaction on May 14, 2002, Stitch became a wholly owned
subsidiary of the Company. The acquisition was accounted for using the purchase
method and, accordingly, the results of the operations of Stitch have been
included in the accompanying consolidated statements of operations since the
acquisition date. The purchase price consisted of the issuance of 22,762,341
shares of Common Stock of the Company in exchange for the outstanding shares of
Stitch and the issuance of warrants to purchase up to 7,587,447 shares of Common
Stock of the Company at $.40 per share at any time through June 30, 2002. The
purchase price also included the assumption of outstanding Stitch stock options
that were converted into options to purchase an aggregate of 2,475,318 shares of
the Company`s Common Stock at $.165 per share at any time prior to May 14, 2007,
warrants to purchase up to 412,553 shares of the Company`s Common Stock at $.40
per share at any time through June 30, 2002 and acquisition related expenses
which included the issuance of 875,000 shares of Common Stock to an investment
banking firm. None of the warrants issued in connection with the acquisition
were exercised as of June 30, 2002. A total of 4,800,000 shares of the Common
Stock issued to the former stockholders of Stitch are being held in escrow to
secure the former stockholder`s indemnification obligations under the Agreement
and Plan of Merger. Such shares are subject to cancellation if there is a breach
of the indemnification (as defined). In connection with the acquisition, the
Company`s shareholders voted in May of 2002 to increase the number of authorized
shares of Common Stock to 150,000,000.
During June 2002, the Company determined that it would vacate the office space
previously occupied by Stitch. Accordingly, the Company accrued the remaining
lease exit costs relating to this property in the amount of approximately
$354,000 as part of the cost of Stitch. While the Company is attempting to
sublease this space, no provision for recovery has been estimated at this time.
F-15
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
3. Acquisition of Stitch Networks Corporation (continued)
The following table summarizes the preliminary purchase price allocation of the
fair value of the assets and liabilities assumed at the date of acquisition:
Current assets $ 2,710,000
Property and equipment 1,700,000
Goodwill 6,801,000
Intangibles 2,920,000
Current liabilities (1,554,000)
Long-term debt (3,976,000)
-----------------
$ 8,601,000
=================
Long-term debt of $2,165,000 was repaid during June 2002.
Unaudited pro-forma combined results of the Company as if the Company acquired
Stitch on July 1, 2000 and July 1, 2001 are as follows:
Year ended June 30
2002 2001
------------------------------
Revenues $ 2,869,466 $ 1,953,250
Loss before cumulative effect of accounting change (19,583,216) (15,921,358)
Cumulative effect of accounting change - (821,000)
------------------------------
Net loss (19,583,216) (16,742,358)
Cumulative preferred dividends (822,561) (836,541)
------------------------------
Loss applicable to common shares $ (20,405,777) $(17,578,849)
==============================
Loss before cumulative effect of accounting change $ (0.36) $ (0.42)
Cumulative effect of accounting change $ - $ (0.02)
==============================
Loss per common share (basic and diluted) $ (0.36) $ (0.44)
==============================
Weighted average number of common shares
outstanding (basic and diluted) 56,676,823 40,369,340
==============================
F-16
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
4. Property and Equipment
Property and equipment consist of the following:
Useful June 30 December 31
Lives 2002 2001 2002
------------------------------------ ---------------
(Unaudited)
Computer equipment and
purchased software 3 years $ 1,855,459 $ 609,775 $1,915,614
Vending machines and related
components 7 years 1,050,220 - 1,091,551
Control systems 3 years 982,371 533,055 1,032,529
Furniture and equipment 5-7 years 503,110 190,836 497,523
Leasehold improvements Lease term 94,031 90,313 94,031
Vehicles 5 years 10,258 10,258 10,258
------------------------- -----------------
4,495,449 1,434,237 4,641,506
------------------------- -----------------
Less accumulated depreciation (2,563,022) (672,913) (2,965,258)
------------------------- -----------------
$ 1,932,427 $ 761,324 $ 1,676,248
========================= =================
5. Accrued Expenses
Accrued expenses consist of the following:
June 30 December 31
2002 2001 2002
---------------------- -----------
(Unaudited)
Accrued professional fees $ 628,372 $ 439,478 $ 700,390
Accrued lease termination payments, net 344,934 - 344,934
Accrued other 264,518 31,414 83,644
Accrued compensation and related sales commissions 225,917 125,668 258,895
Accrued interest 209,885 91,585 241,217
Accrued software license and support costs 144,755 154,229 144,755
Accrued taxes and filing fees 134,411 - 97,244
Accrued product warranty costs 85,827 52,466 99,580
Accrued consulting fees 62,480 435,000 62,480
Advanced customer billings 30,190 25,755 123,332
---------------------- -------------
$2,131,289 $1,355,595 $ 2,156,471
====================== =============
F-17
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
6. Related Party Transactions
At June 30, 2002 and 2001, approximately $30,000 and $70,000, respectively, of
the Company`s accounts payable and accrued expenses were due to a Board member
for legal services performed. At December 31, 2002 approximately $66,000
(Unaudited) of the Company`s accounts payable and accrued expenses were due to a
Board member for legal services performed. During the years ended June 30, 2002
and 2001, the Company incurred approximately $213,000 and $271,000,
respectively, for these services. During the year ended June 30, 2002, and
during the six months ended December 31, 2002, certain Board members
participated in various offerings of debt or equity of the Company for a total
investment of approximately $262,500 and $277,500 (Unaudited) respectively.
Stitch purchases vending machines from Dixie-Narco, Inc. (Dixie), an affiliate
of a shareholder (Maytag Holdings, a subsidiary of Maytag Inc.) of the Company.
There were $139,085 of purchases from Dixie for the six months ended December
31,2002. There were no purchases from Dixie for the period May 14, 2002 to June
30, 2002. Amounts payable to Dixie at June 30, 2002 of $124,333 and at December
31, 2002 of $181,292 (Unaudited) are included in accounts payable in the
accompanying consolidated balance sheets.
7. Commitments
- In connection with an employment agreement, expiring June 30, 2002, the
Company`s Chief Executive Officer has been granted in the event of a "USA
Transaction," as defined, which among other events includes a change in
control of the Company, irrevocable and fully vested rights equal to that
number of shares of Common Stock that when issued to him equals seven
percent of all the then issued and outstanding shares of the Company`s
Common Stock. The Chief Executive Officer is not required to pay any
consideration for such shares. The stock rights have no expiration and are
not affected by the Chief Executive Officer`s termination of employment.
The employment agreement was extended to June 30, 2004.
- The Company conducts its operations from various facilities under operating
leases. Rent expense under such arrangements was approximately $220,000 and
$188,000 during the years ended June 30, 2002 and 2001, respectively, and
approximately $90,000 (Unaudited) during each of the six months ended
December 31, 2002 and 2001, respectively.Future minimum lease payments are
reflected below. During the years ended June 30, 2002 and 2001, the Company
entered into agreements to lease $0 and $118,207 respectively, of computer
equipment accounted for as capital leases. This computer equipment is
included in property and equipment in the accompanying consolidated
financial statements. Capital lease amortization of approximately $54,000
and $34,000 is included in depreciation expense for the years ended June
30, 2002 and 2001, respectively, and approximately $27,000 (Unaudited)
during each of the six months ended December 31, 2002 and 2001.
F-18
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
7. Commitments (continued)
Future minimum lease payments subsequent to June 30, 2002 under capital and
noncancelable operating leases are as follows:
Capital Leases Operating Leases
----------------------------------
2003 $ 52,942 $ 155,000
2004 15,960 109,000
2005 1,779 80,000
2006 - 20,000
----------------------------------
Total minimum lease payments 70,681 $ 364,000
=================
Less amount representing interest 7,697
---------------
Present value of net minimum lease payments 62,984
Less current obligations under capital leases 46,300
---------------
Obligations under capital leases, less current portion $ 16,684
===============
8. Long-Term Debt
Long-term debt consists of the following:
June 30 December 31
2002 2001 2002
----------------------- ------------
(Unaudited)
Bank facility $1,255,113 $ - $ 1,044,900
Working capital loans 275,000 - 194,635
IBM inventory financing 19,632 45,785 2,047
Capital lease obligations (Note 7) 62,984 124,023 24,799
----------------------- ------------
1,612,729 169,808 1,266,381
Less current portion 850,644 116,231 789,373
----------------------- ------------
$ 762,085 $ 53,577 $ 477,008
======================= ============
At June 30, 2002 the Company has a $1.5 million bank facility available (the
Facility) to fund the purchase of vending machines placed at locations where
Kodak film products are sold. Borrowings are made from time to time under the
Facility, with repayment schedules set at the time of each borrowing, including
equal monthly payments over 36 months and an interest rate based upon 495 basis
points over the three year U.S. Treasury Notes. The Company has granted the bank
a security interest in the film products vending machines. Repayment of
principal is also insured by a Surety Bond issued by a third-party insurer in
exchange for an initial fee paid by the Company. Subsequent to June 30, 2002,
the Company has not borrowed any additional funds under this Facility.
F-19
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
8. Long-Term Debt (continued)
In connection with the Stitch acquisition (Note 3), the Company assumed long
term debt of $3,976,000 which included a vending equipment borrowing facility
and working capital loans. The Company repaid $2,165,000 of the working capital
loans in June 2002. All but $225,000 of these working capital loans bear
interest at a variable rate based on the bank`s prime rate. These loans are
secured by the assets of Stitch. At June 30, 2002, $275,000 of working capital
loans are outstanding of which $225,000, which bears interest at 6.75%, was
payable on July 8, 2002 and $50,000 was payable on demand. On July 26, 2002,
August 29, 2002, September 27, 2002, October 31, 2002, February 3, 2003 and
February 19, 2003, the bank agreed to extend the due date of these notes until
September 1, 2002, October 1, 2002, November 1, 2002, December 1, 2002, March 1,
2003 and March 17, 2003, respectively under several forebearance agreements. In
connection with these extensions, the Company paid $3,000 of fees to the bank.
Subsequent to June 30, 2002, the Company paid $80,365 to the bank, reducing the
outstanding balance to $194,635 (unaudited) at December 31, 2002.
The Company also had an inventory financing arrangement whereby IBM Credit
Corporation originally granted the Company a $1.5 million equipment line of
credit. This arrangement expired in fiscal year 2002. The outstanding balance at
June 30, 2002 and 2001, of $19,632 and $45,785, respectively, is secured by the
underlying inventory. Interest accrues on the outstanding balance at 10% per
annum, subject to adjustment if the outstanding balance is outstanding greater
than 180 days.
9. Income Taxes
At June 30, 2002 and 2001, the Company had net operating loss carryforwards of
approximately $54,769,000 and $31,234,000, respectively, to offset future
taxable income expiring through approximately 2022. At June 30, 2002 and 2001,
the Company recorded a net deferred tax asset of approximately $20,546,000 and
$12,418,500, respectively, which was principally reduced by a valuation
allowance of the same amount as the realization of the deferred tax asset is not
certain, principally due to the lack of earnings history.
The timing and extent in which the Company can utilize future tax deductions in
any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations. Stitch had net operating loss
carryforwards of approximately
F-20
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
9. Income Taxes (continued)
$10,985,000 at the acquisition date. Such net operating loss carryforwards are
limited under these provisions as to the amount available to offset future
taxable income and such limited amounts are reflected below.
The deferred tax assets arose primarily from the use of different accounting
methods for financial statement and income tax reporting purposes as follows:
June 30
2002 2001
---------------------------
Deferred tax assets:
Net operating loss carryforwards $ 19,837,000 $ 13,237,000
Compensation expense on stock option re-pricing - 170,500
Deferred research and development costs 480,000 125,000
Software development costs 1,008,000 -
Other 392,000 131,000
---------------------------
21,717,000 13,663,500
Deferred tax liabilities:
Intangibles (1,171,000) -
Software development costs - (1,245,000)
---------------------------
20,546,000 12,418,500
Valuation allowance (20,546,000) (12,418,500)
---------------------------
Deferred tax asset, net $ - $ -
===========================
Amounts assigned to intangibles acquired in the Stitch acquisition exceeded the
tax basis. Such excess will increase taxable income as the Intangibles
(excluding goodwill) are amortized. The net operating loss carryforwards will be
used to offset the increase in taxable income. Accordingly, the Company recorded
a deferred tax liability of $1,171,000 and a deferred tax asset in the same
amount related to these intangibles at the acquisition date.
10. Senior Notes and Debentures
During June 2002, the Company commenced a $2,500,000 2002-A private placement
offering (subsequently increased to $4,300,000 in October 2002) consisting of
12% Convertible Senior Notes due December 31, 2005. Each $10,000 Note is
convertible into Common Stock at $.20 per share at any time through December 31,
2005 and interest is payable quarterly. Each note holder initially received
20,000 Common Stock warrants, however subsequent to June 30, 2002, the Board of
Directors amended the offering to replace the warrants with 20,000 shares of
Restricted Common Stock. The estimated fair value of the Common Stock warrants
of $121,225 (using the Black-Scholes method) and the intrinsic value of the
beneficial conversion feature of $211,152 have been allocated to equity. This
resulting debt discount is being amortized to interest expense through December
31, 2005. Through June 30, 2002, the Company sold 44.4 units, generating
proceeds of $444,083, of which $35,000 is reflected as subscriptions receivable
at June 30, 2002. Such amounts were collected subsequent to June
F-21
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
10. Senior Notes and Debentures (continued)
30, 2002. The offering was scheduled to terminate June 30, 2002 with extension
possible for up to an additional 60 days. The offering was extended to October
31, 2002 (Note 16).
During fiscal year 2002, the Company commenced a $2,500,000 2001-D private
placement offering (later increased to $6,500,000), consisting of 12%
Convertible Senior Notes due December 31, 2004. Each $10,000 Note is convertible
into Common Stock at $.40 per share, and interest is payable quarterly. Certain
stockholders of the Company, who received warrants to purchase Common Stock of
the Company as a part of earlier private placements, were offered the
opportunity to cancel a portion of such warrants and to receive an equivalent
number of new warrants at $.10 expiring on December 31,2002 if they invested in
the 2001-D offering. The original warrants were scheduled to expire December 31,
2001 or March 31, 2002 (according to their original terms) at $.50.The estimated
fair value of the new Common Stock warrants of $1,787,084 (using the Black-
Scholes method) and the intrinsic value of the beneficial conversion feature of
$1,623,352 have been allocated to equity. This resulting debt discount is being
amortized to interest expense through December 31, 2004. The debt discount is
being amortized to interest expense through December 31, 2004. Through June 30,
2002, the Company issued 481.4 units, generating net cash proceeds of
$3,906,740. An additional $907,853 of notes were issued to consultants for
services rendered. The 2001-D offering was extended by the Company to close on
October 31, 2002 (Note 16).
During August 2001, the Company executed a Securities Purchase Agreement with an
investment company for the purchase of $225,000 of a 9.75% Convertible Debenture
(the "Debenture") due August 2003. Interest on the Debenture is payable monthly
in arrears. On June 18, 2002, the investment company increased the Debenture by
$100,000, extended the maturity date of the $325,000 to August 2004 and lowered
the conversion rate. The investment company also paid the Company $300,000
towards a future exercise of Common Stock warrants. Of this amount $20,000 was
used during June 2002 to exercise Common Stock warrants. The remaining balance
of $280,000 is reflected in deposits at June 30, 2002, ($120,000 (unaudited) at
December 31, 2002).
The Debenture is convertible at a price equal to the lesser of $1.00 or 72% (80%
prior to June 18, 2002) of the lowest closing bid price of the Company`s Common
Stock during the 20 day period prior to the conversion. The Company reserves the
right to prepay the portion of the Debenture that the investment company elected
to convert, plus interest, at 150% of such amount, if the price of Common Stock
is less than $0.40 per share. At the time of conversion, the Company will issue
to the holder warrants to purchase an amount
F-22
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
10. Senior Notes and Debentures (continued)
of Common Stock equal to ten times the number of shares issued upon the
conversion of the Debenture. The warrants are exercisable at the same conversion
price as the Debenture. Due to the significance of the beneficial conversion
feature associated with this instrument (as calculated using the Black Scholes
method), the entire $325,000 of proceeds has been allocated to the warrants, and
is included in equity. The debt discount is being amortized to interest expense
over the term of the Debenture. During fiscal year 2002, the investment company
converted $82,000 of the Debenture, resulting in the issuance of 333,678 shares
of Common Stock. The investment company also exercised warrants resulting in the
issuance of 3,336,780 shares of Common Stock and generating net cash proceeds of
$886,250.
During fiscal year 1999, the Company`s Board of Directors authorized a private
placement offering (the "1999 Senior Note Offering"). Each unit, as amended,
consisted of a 12% Senior Note in the principal amount of $10,000, maturing on
December 31, 2001, 2,000 1999-A Common Stock Purchase Warrants (each warrant
entitled the holder to purchase one share of Common Stock at $1.00 through
December 31, 2001) and 1,000 shares of Series B Equity Participating Preferred
Stock (Series B). A total of 461.8 units (as adjusted) were sold in this
Offering. The Series B was converted into 1,847,200 shares of Common Stock in
connection with the Company`s fiscal year 1999 reverse stock split. During
October 1999, a conversion feature was added to the Senior Notes whereby the
Notes were convertible into Common Stock at the rate of $2.50 per share any time
through the Senior Notes maturity of December 31, 2001. There was no
beneficial coversion feature required for this offering.
During fiscal year 2001, the Company authorized a private placement offering
("2000 Senior Note Offering") of 670 units at a unit price of $10,000. Each unit
consisted of a 12% Convertible Senior Note in the principal amount of $10,000,
maturing December 31, 2003 and 2,000 shares of Restricted Common Stock. Each
2000 Senior Note is convertible into Common Stock at $1.25 per share anytime
through its maturity. This offering provided for the holders of the 1999 Senior
Notes to exchange their 1999 Senior Notes into 2000 Senior Notes. All payments
of interest on the 2000 Notes can be used by the holder, at the holder`s option,
to purchase shares of Common Stock at specific prices established by the Board
of Directors.
During fiscal year 2001 the Company issued 1,136,300 shares of Common Stock in
connection with the 2000 Senior Notes. The fair value of the Common Stock on the
date such shares were granted of $1,215,843 and the intrinsic value of the
beneficial conversion feature in the 2000 Senior Notes of $409,104 was allocated
to equity. The resulting debt discount is being amortized to interest expense
through December 31, 2003. Through June 30, 2002, $647,500 of such Notes were
converted into 518,000 shares of Common Stock. Subsequent to June 30, 2002,
there have been no further conversions.
F-23
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
10. Senior Notes and Debentures (continued)
The Company sold 568.15 units in the 2000 Senior Note Offering of which 382.3
units ($3,823,000) of the 1999 Senior Notes were exchanged for 2000 Senior
Notes, 124.85 units were purchased with cash, resulting in gross proceeds of
$1,248,500 and 61 units were issued in exchange for services provided by
consultants in the amount of $610,000. The exchange of the 1999 Senior Notes to
the 2000 Senior Notes was determined to be a substantial modification of the
terms of the original debt instrument and, accordingly, the Company wrote-off
the unamortized debt discount and other issuance costs associated with the
exchange of the 1999 Senior Notes in the amount of $863,000.
During the years ended June 30, 2002 and 2001, the Company issued 674,431 and
121,541 shares of Common Stock respectively, in lieu of cash payment for
interest on the Senior Notes.
A summary of the various Senior Note activities are as follows:
1999 Senior 2000 Senior 2001 Senior 2002 Senior
Notes Notes Notes Notes
----------------------------------------------------------
Outstanding at June 30, 2000 $ 4,073,000 $ $ $
Issued for cash and services 1,858,500
Exchange 1999 Senior Notes for
2000 Senior Notes (3,823,000) 3,823,000
Converted into Common Stock (10,000) (25,000)
----------------------------------------------------------
Outstanding at June 30, 2001 240,000 5,656,500
Converted into Common Stock (622,500)
Repaid at maturity (240,000)
Issued for cash and services 4,814,593 444,083
Less: Unamortized debt discount
and other issuance costs net
of accretion - (750,295) (2,928,567) (323,989)
----------------------------------------------------------
Balance at June 30, 2002 - 4,283,705 1,886,026 120,094
----------------------------------------------------------
Issued for cash and services
(Note 16) (Unaudited) $ - $ - $ (167,092) $ 3,839,924
Converted into Common Stock
(Unaudited) - - - (222,058)
Less: Unamortized debt discount
and other issuance costs net
of accretion (Unaudited) 250,098 748,080 (2,668,302)
----------------------------------------------------------
Balance at December 31, 2002
(Unaudited) $ $ 4,533,803 $ 2,467,014 $ 1,069,658
==========================================================
The unamortized debt discount and other issuance costs represents fees paid in
connection with these financings, the estimated fair value of the detachable
equity instruments issued in connection with these financings, and any
beneficial conversion embedded in the debt at the commitment date, which are
being amortized over the
F-24
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
10. Senior Notes and Debentures (continued)
remaining life of the respective debt instruments. Debt discount amortization,
which has been reflected as interest expense in the consolidated statements of
operations, was approximately $1,513,000 and $765,000 for the years ended June
30, 2002 and 2001, and $1,346,000 (unaudited) for the six months ended December
31, 2002.
11. Series A Preferred Stock
The authorized Preferred Stock may be issued from time to time in one or more
series, each series with such rights, preferences or restrictions as determined
by the Board of Directors. Each share of Series A Preferred Stock shall have the
right to one vote and is convertible at any time into one share of Common Stock.
Each share of Common Stock entitles the holder to one voting right. Series A
Preferred Stock provides for an annual cumulative dividend of $1.50 per share
payable to the shareholders of record in equal parts on February 1 and August 1
of each year. Cumulative unpaid dividends at June 30, 2002 and 2001 amounted to
$5,175,571 and $4,621,150, respectively. Cumulative unpaid dividends are
convertible into common shares at $10.00 per common share at the option of the
shareholder. During the years ended June 30, 2002 and 2001, certain holders of
the Preferred Stock converted 26,002 and 11,160 shares, respectively, into
26,002 and 11,160 shares of Common Stock, respectively. Certain of these
shareholders also converted cumulative preferred dividends of $268,140 and
$87,030 into 26,814 and 8,703 shares of Common Stock, respectively, during the
years ended June 30, 2002 and 2001, respectively. During the six months ended
December 31, 2002 and 2001, certain holders of the Preferred Stock converted 150
and 4,325 shares, respectively into 150 and 4,325 shares of Common Stock,
respectively. These shareholders also converted cumulative preferred dividends
of $1,570 and $38,920, respectively, into 157 and 3,892 shares of Common Stock
during the six months ended December 31, 2002 and 2001, respectively. The Series
A Preferred Stock may be called for redemption at the option of the Board of
Directors at any time on and after January 1, 1998 for a price of $11.00 per
share plus payment of all accrued and unpaid dividends. No such redemption has
occurred as of June 30, 2002 or December 31, 2002. In the event of any
liquidation, the holders of shares of Series A Preferred Stock issued shall be
entitled to receive $10.00 for each outstanding share plus all cumulative unpaid
dividends. If funds are insufficient for this distribution, the assets available
will be distributed ratably among the preferred shareholders.
12. Common Stock Transactions
During the years ended June 30, 2002 and 2001, the Company`s Board of Directors
authorized the following private placement offerings of the Company`s Common
Stock:
- 2000-B offering for the issuance of 895,000 shares of Common Stock at
$1.00 per share generating net proceeds of $777,151 after deducting
related offering costs;
- 2001-A offering for the issuance of 450,000 shares of Common Stock at
$1.00 per share generating net proceeds of $427,500 after deducting
related offering costs;
F-25
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
12. Common Stock Transactions (continued)
- 2001-B offering for the issuance of 8,400,000 shares of Common Stock
at $.60 per share. Through June 30, 2001, the Company issued 2,669,400
shares of Common Stock generating net proceeds of $1,546,885 after
deducting related offering costs. During fiscal year 2002 the Company
issued 4,726,040 shares of Common Stock from this offering generating
additional net proceeds of $2,754,371. Additionally, each dollar
invested entitled the purchaser to receive one Common Stock warrant at
$.50 per share expiring in December 2001 and one Common Stock warrant
at $.50 per share expiring in June 2002.
- 2001-C offering for the issuance of 4,500,000 shares of Common Stock
at $.50 per share. In each share purchased the holder received a
warrant to purchase a share of Common Stock at $.50 per share expiring
March 2002. The Company issued 4,046,684 shares of Common Stock
generating net proceeds of $1,992,852 after deducting related offering
costs. Of this amount, $149,750 has not been received, and,
accordingly is reflected in subscriptions receivable at June 30, 2002.
The Company issued 2,784,137 and 200,000 shares of Common Stock for professional
services during the years ended June 30, 2002 and 2001, respectively. Such
shares were valued based on the fair value of the Company`s Common Stock on the
date the shares were granted. During the year ended June 30, 2002 and 2001, the
Company also issued 2,340,000 and 418,250 shares of Common Stock to certain
employees and officers. The shares were fully vested on the date of grant;
accordingly, the Company recorded compensation expense of $981,000 during fiscal
year 2002 and $474,995 during fiscal year 2001 based on the fair value of the
Company`s Common Stock on the date the shares were granted.
During fiscal year 2000, the Company entered into an Investment Agreement with
Swartz Private Equity LLC, for an equity line up to $20 million over a period
not to exceed three years. Investments are determined monthly based on the
current market prices of the Company`s Common Stock in accordance with the terms
of the Agreement. The purchase price per share would equal 91% of the market
price of the Common Stock at the time of purchase, and additional warrants at
the same price would be granted in an amount equal to 10% of the number of
shares actually purchased. Swartz received 1,200,000 Commitment Warrants with 10
year terms at an initial exercise price of $1.00, adjusted to lower market
pricing if applicable, and will be granted additional Commitment Warrants at the
same price and term, if required, to keep the number of Commitment Warrants
equal to 5% (decreasing over a five year period to 0%) of the outstanding Common
Stock of the Company on a fully diluted basis. An additional 380,828 warrants
were granted during fiscal 2001 in connection with this antidilution provision.
F-26
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
12. Common Stock Transactions (continued)
During the year ended June 30, 2001, Swartz purchased 29,010 shares of Common
Stock pursuant to the Investment Agreement. There were no net proceeds to the
Company from the sale of these shares after deducting the related cash offering
expenses previously incurred. No purchases were made during the fiscal year
ended June 30, 2002. The agreement was terminated during April 2002.
During fiscal year 2000, the Company`s Board of Directors awarded 120,000 shares
of the Company`s Common Stock, at $2.00 per share, to certain executive
officers. Pursuant to their employment agreements, these officers would be
issued the Common Stock if employed by the Company on June 30, 2002. The Company
recorded deferred compensation of $240,000 in connection with these awards.
Compensation expense of $103,000 has been recorded to reflect the amortization
of the shares earned during each of the years ended June 30, 2002 and 2001,
respectively. All officers were employed by the Company as of June 30, 2002.
During October 1999, the Company`s Board of Directors authorized a private
placement offering (the "1999-B" offering) to accredited investors of 150 units
(later increased to 356 units by the Board of Directors) at a unit price of
$10,000. Each unit of the $3,560,000 Offering consists of 10,000 shares of
restricted Common Stock at $1.00 per share, and 10,000 1999-B Common Stock
purchase warrants. During fiscal year 2000 all 356 units were sold, resulting in
net proceeds of $3,463,942 ($3,560,000 less offering costs of $96,058) to the
Company. Each 1999-B Common Stock purchase warrant entitled the holder to
purchase one share of restricted Common Stock for $2.00 at any time through
March 31, 2000. The 1999-B Common Stock purchase warrants were modified several
times between January 2000 and August 2000 reducing their exercise price to
$1.00 per share and extending the expiration date of the warrants to December
31, 2000. Additionally, those 1999-B Common Stock purchase warrant holders who
exercised their purchase warrants on or before December 31, 2000 were granted a
further extension of the warrants` expiration date to March 31, 2001. As a
result of these reductions in the exercise price, the Company`s Board of
Directors authorized the refunding of the $1 reduction per warrant to those
investors who exercised their warrants prior to the exercise price reduction.
F-27
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
12. Common Stock Transactions (continued)
A summary of Common Stock Warrant activity for the years ending June 30, 2002
and 2001 and six months ending December 31, 2002 is as follows:
Warrants
-------------
Outstanding at June 30, 2000 3,711,250
Issued 8,889,628
Exercised (2,112,100)
Cancelled (2,255,750)
-------------
Outstanding at June 30, 2001 8,233,028
Issued 22,602,593
Exercised (1,833,529)
Cancelled (22,162,272)
-------------
Outstanding at June 30, 2002 6,839,820
Issued (Unaudited) 43,813,104
Exercised (Unaudited) (6,281,579)
Cancelled (Unaudited) (151,500)
-------------
Outstanding at December 31, 2002
(Unaudited) 44,219,845
=============
The exercise price and exercise dates of outstanding and exercisable warrants
outstanding at June 30, 2002 are as follows:
Outstanding and
Exercisable Exercise Price Expiration Date
-----------------------------------------------------
3,971,163 $ 0.10 December 31, 2002
303,829 0.20 June 30, 2004
150,000 0.70 August 2, 2003
650,000 0.70 November 23, 2003
1,200,000 0.91 August 29, 2010
377,927 1.00 April 24, 2011
2,901 1.03 April 30, 2011
75,000 1.25 June 30, 2006
100,000 2.00 June 22, 2003
1,500 4.00 July 2, 2002
2,500 4.00 March 5, 2003
5,000 4.00 August 17, 2003
----------------
6,839,820
================
During the years ended June 30, 2002 and 2001, the Company`s Board of Directors
made numerous amendments to the outstanding Common Stock Warrants whereby the
Company reduced the exercise price and extended the expiration terms. The above
table reflects the status of the warrants as of June 30, 2002.
F-28
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
The exercise price and exercise dates of outstanding and exercisable warrants
outstanding at December 31, 2002 are as follows (Unaudited):
Outstanding and
Exercisable Exercise Price Expiration Date
-----------------------------------------------------
7,142,858 $ 0.07 October 31, 2003
7,142,858 0.07 October 26, 2007
7,529,742 0.10 March 31, 2003
10,016,155 0.10 April 15, 2003
5,000,000 0.10 October 31, 2003
2,798,117 0.10 December 31, 2002
750,000 0.15 October 31, 2007
1,426,787 0.20 June 30, 2004
650,000 0.70 November 23, 2003
1,200,000 0.91 August 29, 2010
377,927 1.00 April 24, 2011
2,901 1.03 April 30, 2011
75,000 1.25 June 30, 2006
100,000 2.00 June 22, 2003
2,500 4.00 March 5, 2003
5,000 4.00 August 17, 2003
----------------
44,219,845
================
13. Stock Options
The Company`s Board of Directors has granted options to employees and its Board
members to purchase shares of Common Stock at or above fair market value. The
option term and vesting schedule are established by the contract that granted
the option.
The following table summarizes all stock option activity during the years ended
June 30, 2002 and 2001, and for the six months ended December 31, 2002:
Common Shares
Under Options Exercise Price Per
Granted Share
-----------------------------------
Balance at June 30, 2000 984,767 $ .50-$5.00
Granted 6,935,000 $ 1.00-$1.50
Canceled or Expired (3,033,100) $ 1.00-$2.50
-----------------------------------
Balance at June 30, 2001 4,886,667 $ .50-$5.00
Granted 4,505,318 $ .165-$.70
Canceled (50,000) $ .40
-----------------------------------
Balance at June 30, 2002 5,240,485 $ .165-$5.00
Canceled or expired (1,923,000) $ .40-$5.00
(Unaudited)
-----------------------------------
Balance at December 31, 2002 3,317,485 $ .165-$5.00
(Unaudited)
===================================
F-29
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
The price range of the outstanding Common Stock options at June 30, 2002 is as
follows:
Weighted Average
Option Remaining Options
Exercise Prices Options Outstanding Contract Life (Yrs.) Exercisable
------------------------------------------------------------------------------
$.165 2,475,318 4.87 2,475,318
$.40 500,000 2.78 500,000
$.50 5,000 0.80 5,000
$.70 400,000 0.97 400,000
$1.00 735,000 4.47 615,002
$1.50 305,000 0.98 305,000
$2.00 651,167 2.48 651,167
$2.50 84,000 0.96 84,000
$4.50 80,000 1.10 80,000
$5.00 5,000 0.17 5,000
------------- ---------------
5,240,485 5,120,487
============= ===============
13. Stock Options (continued)
The price range of the outstanding Common Stock options at December 31,
2002 is as follows (Unaudited):
Weighted Average
Option Remaining Options
Exercise Prices Options Outstanding Contract Life (Yrs.) Exercisable
------------------------------------------------------------------------------
$.165 2,475,318 4.37 2,475,318
$.70 550,000 0.50 550,000
$1.00 125,000 3.35 125,000
$1.50 52,000 0.50 52,000
$2.00 41,167 1.75 41,167
$2.50 74,000 0.45 74,000
------------- ---------------
3,317,485 3,317,485
============= ===============
Pro forma information regarding net loss and net loss per common share
determined as if the Company is accounting for stock options granted under the
fair value method of SFAS 123 is as follows:
Year Ended Six month ended
June 30 December 31,
2002 2001 2002
-------------------------------------------
(Unaudited)
Net loss applicable to common shares as
reported under APB 25 $(18,137,368) $(11,792,785) $(7,602,177)
Stock option expense per SFAS 123 (985,046) (524,845) (30,359)
-------------------------------------------
Pro forma net loss $(19,122,414) $(12,317,630) $(7,632,536)
===========================================
Loss per common share as reported $ (0.50) $ (.70) $ (0.10)
===========================================
Pro forma net loss per common share $ (0.53) $ (.74) $ (0.10)
===========================================
F-30
The fair value for the Company`s stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years 2002 and 2001: an expected life of
2 years; no expected cash dividend payments on Common Stock, respectively; and
for fiscal 2002 a risk-free interest rate of 4.5% to 5.5% and for fiscal 2001,
5.5%, and volatility factors of the expected market price of the Company`s
Common Stock, based on historical volatility of .85 to .95 for fiscal 2002, and
1.100 for fiscal 2001. For the six months ended December 31, 2002, the fair
value for the Company`s stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: an expected life of 2 years; no expected cash dividend payments on
Common Stock; and a risk-free interest rate of 5.5% and a volatility factor of
the expected market price of the Company`s Common Stock, based on historical
volatility of 1.057.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. As noted above, the Company`s stock options are vested over an
extended period. In addition, option models require the input of highly
subjective assumptions including future stock price volatility. Because the
Company`s stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management`s opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value of the Company`s stock options. The Company`s pro forma information
reflects the impact of the reduction in price of certain stock options. The pro
forma results above are not necessarily reflective of the effects of applying
SFAS 123 in future periods.
F-31
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
13. Stock Options (continued)
As of June 30, 2002, the Company has reserved shares of Common Stock for the
following:
Exercise of Common Stock options 5,240,485
Exercise of Common Stock warrants 6,839,820
Conversion of remaining Debentures
and exercise of related warrants 19,038,462
Conversions of Preferred Stock
and cumulative Preferred Stock
dividends 1,046,839
Conversions of Senior Notes 19,172,264
------------
51,337,870
============
As of December 31, 2002, the Company has reserved shares of Common Stock for the
following (Unaudited):
Exercise of Common Stock options 3,317,485
Exercise of Common Stock warrants 44,219,845
Conversion of remaining Debentures
and exercise of related warrants 6,105,000
Conversions of Preferred Stock
and cumulative Preferred Stock
dividends 1,086,228
Conversions of Senior Notes 35,943,036
------------
Total 90,671,594
============
14. Retirement Plan
The Company`s Savings and Retirement Plan (the Plan) allows employees who have
attained the age of 21 and have completed six months of service to make
voluntary contributions up to a maximum of 15% of their annual compensation, as
defined in the Plan. Through June 30, 2000, the Plan did not provide for any
matching contribution by the Company. However, starting at the beginning of
fiscal year 2001, the Company has amended the Plan to include a Company matching
contribution up to 10% of an employee`s compensation. The Company contribution
for the years ended June 30, 2002 and 2001 was approximately $48,000 and
$51,000, respectively. The Company contribution for the six months ended
December 31, 2002 and 2001 was $34,250 (Unaudited) and $20,500 (Unaudited),
respectively.
F-32
15. Contingencies
In the normal course of business, various legal actions and claims are pending
or may be instituted or asserted in the future against the Company. The Company
does not believe that the resolution of these matters will have a material
effect on the financial position or results of operations of the Company.
16. Subsequent Events (Unaudited)
During September 2002, the Company issued to an investor 2,000,000 shares of its
restricted Common Stock at $.12 per share generating gross proceeds of $240,000.
This investor also received a warrant to purchase up to 2,000,000shares of
restricted Common Stock of the Company at $.10 per share at any time on or
before November 30, 2002 (subsequently extended to April 30, 2003) and if all
such warrants are exercised, the investor was granted another warrant to
purchase up to 2,000,000 shares of Common Stock at $.10 per share expiring April
30, 2003. To date, none of these warrants have been exercised.
Subsequent to June 30, 2002 and through October 31, 2002 the Company issued
approximately $3.84 million of 2002- A Convertible Senior Notes. The estimated
fair value of the shares issued in connection with these Senior Notes during the
six months ended December 31, 2002 of $ 1,628,837 and the intrinsic value of the
beneficial conversion feature of $ 1,324,810 have been allocated to equity. This
resulting debt discount is being amortized to interest expense through December
31, 2005. A total of $1,329,800 of these Senior Notes are to to certain
officers, directors and consultants of the Company in exchange for service to be
performed and are therefore reflected as prepaid professional fees at December
31, 2002.
During October 2002, the Company issued to an investor 1,500,000 shares of its
restricted Common Stock at $.10 per share generating net proceeds of $123,000.
The investor also received a warrant to purchase up to 750,000 shares of
restricted Common Stock of the Company at an exercise price of $0.15 per share
for a five year period from the issuance date. Within seven business days of the
effectiveness of a registration statement to register the 1,500,000 shares, the
investor has agreed to purchase an additional 1,500,000 shares of restricted
Common Stock at $.10 per share and receive another warrant to purchase up to
750,000 shares of restricted Common Stock at $.15 per share.
During October 2002, the Company issued to an investor 3,571,429 shares of
its restricted Common Stock at $.07 per share generating net proceeds of
$244,925. This investor also received a warrant to purchase up to 7,142,858
shares of restricted Common Stock of the Company at $.07 per share at any time
on or before October 26, 2007, and a warrant to purchase up to 7,142,858 shares
of Common Stock at $.07 per share and up to 5,000,000 shares at $.10 per share
over a one year period. None of these warrants have been exercised as of
December 31, 2002.
During October 2002 the Company`s Board of Directors also approved that for
the quarterly interest payment made by the Company on the 12% Convertible Senior
Notes (for September 30, 2002 and December 30, 2002), at the option of the note
holder, the interest payment due can be used to purchase shares of the Company`s
Common Stock at a rate of $.20 per share. For each share purchased, the note
holder shall receive a warrant to purchase one share of the Company`s Common
Stock at $.20 per share exercisable at any time prior to June 30, 2004. During
the three and six months ended December 31, 2002, 529,324 and 593,634 shares
respectively, were issued for payment of the quarterly interest payment and
529,324 and 593,634 warrants to purchase Common Stock were issued to the note
holders, respectively. The fair value of the warrants issued of approximately
$93,000 was determined using a Black Scholes Valuation Model.
During October 2002, the Company`s Board of Directors authorized the
issuance of 1,480,000 shares of its Common Stock to certain of its employees and
consultants at the fair value of the underlying shares on the grant date. Such
shares were issued for services to be performed in subsequent periods. At
December 31, 2002, $236,800 is reflected in prepaid professional fees for the
services that have not been performed as of December 31, 2002.
During October 2002, the Company granted to all of the holders of the 12%
Convertible Senior Notes, 10,306,026 Common Stock warrants to purchase Common
Stock at $.10 per share. The total number of the warrants issued was that number
of shares equal to 75% of the dollar amount of the Senior notes held by the note
holders. The warrants are exercisable through November 30, 2002 (subsequently
extended through January 31, 2003). Upon the exercise of this warrant by the
Senior note holder, the Company granted an identical number of warrants to that
note holder with an exercise price of $0.10 per share exercisable through March
31, 2003. Through December 31, 2002, the note holders exercised a total of
5,080,261 Common Stock warrants of the originally granted warrants of the
10,306,026 warrants initially granted, generating gross proceeds to the Company
of $508,026. An additional 5,080,261 warrants were granted upon the exercise of
the initial warrant to these note holders at December 31, 2002. Of these
additional March 2003 warrants, 291,376 were exercised as of December 31, 2002,
generating gross proceeds to the Company of $29,138. Subsequent to December 31,
F-33
2002 and through February 12, 2003, 475,909 of the Common Stock warrants
expiring on January 31, 2003 and March 31, 2003, were exercised at $.10 per
share by the 12% Senior Note Holders generating gross proceeds of $47,591.
On October 28, 2002 at a special meeting of shareholders, the Company`s
shareholders approved an increase in the number of authorized shares of the
Company`s Common Stock from 150,000,000 shares to 200,000,000 shares and
approved an increase in the size of the Board of Directors from ten to eleven
members
During the six months ended December 31, 2002, the holder of the Covertible
debenture (Note 10) converted $51,000 of the Debenture resulting in the issuance
of 495,421 shares of Common Stock, and exercised related warrants for 4,954,210
shares, resulting in gross proceeds of $510,000 during the six months ended
December 31, 2002. The holder has paid the Company $120,000 towards
a future exercise of Common Stock warrants which has been reflected in deposits
at December 31, 2002.
On February 14, 2003 at the Annual Shareholders Meeting, the Company`s
shareholders approved an increase in the number of authorized shares of the
Company`s Common Stock from 200,000,000 shares to 300,000,000 shares.
In February 2003, Jubilee Investment Trust, PLC ("Jubilee"), a United
Kingdom investment trust whose shares trade on the London Stock Exchange, made
to make an equity investment in USA Technologies at U.S. $0.20 per share.
Jubilee is a newly established investment trust set up to invest in securities
traded on a range of public markets, primarily in the United Kingdom. USA
Technologies issued to Jubilee 15,000,000 shares of Common Stock of USA
Technologies at a price per share of U.S.$0.20 with an aggregate value of
U.S.$3,000,000. In full payment for the shares of USA Technologies, Jubilee
issued to USA Technologies a U.S.$3,000,000 equivalent of their shares
(1,870,091 shares of Jubilee at a price per share valued at One British Pound
which was the initial public offering price per share for the Jubilee shares).
The exchange rate used by the parties for the transaction was One British Pound
equals U.S.$1.6042. The Company intends to attempt to sell the Jubilee shares
from time to time in order to generate cash. In addition, the Jubilee shares
would be available to pledge as collateral for a loan.
The shares issued to Jubilee by USA Technologies are not registered
under the Securities Act of 1933, as amended. The Jubilee shares issued to USA
Technologies are admitted to listing on the London Stock Exchange under
thesymbol JIT. USA Technologies has agreed not to sell the Jubilee shares for a
period of 90 days from January 24, 2003, and to sell a maximum of 10% of the
Jubilee shares during each month thereafter. Jubilee has agreed not to sell USA
Technologies` shares for a period of two (2) years from the date of issuance
unless USA Technologies agrees otherwise. USA Technologies has agreed to use its
best efforts to file an appropriate Registration Statement with the Securities
and Exchange Commission no later than June 30, 2003 registering all of the
shares issued to Jubilee for resale under the Act and to use its best efforts to
keep such registration statement effective for a period of three years.
In March 2003 the Company`s Board of Directors granted to the holders of the
Senior Notes due in December 2003 the right to extend the maturity date to
December 31, 2006 in exchange for the conversion rate on these notes from $1.25
per share to $.20 per share. Management anticipates substantially all of the
note holders will accept this change and, accordingly the Company will not
require any cash to fund these obligations at December 31, 2003.
F-34
In March 2003, the Company issued warrants to La Jolla Cove Investors, Inc.
to purchase up to 9,000,000 shares at $.10 per share. The warrants expire as
follows: 3,000,000 on the three month anniversary of the effective date of the
registration statement registering the shares; 3,000,000 on the 6 month
anniversary of such effective date; and 3,000,000 on the 9 month anniversary of
such effective date. The warrants may not be exercised without USA`s consent on
any date on which the closing price of our shares is less than $.40. The Company
has agreed to register the shares underlying the warrants for resale under the
Act for a period of one year. The warrants were offered and sold to La Jolla
pursuant to the exemption from registration set forth in Section 4(2) of the
Act.
In April 2003, the Company issued 551,327 shares and warrants to purchase
up to 551,327 shares to the holders of the senior notes who elected to receive
these securities in lieu of the cash interest payment due for the quarter ended
March 31, 2003. The shares were purchased at the rate of $.20 per share and the
warrants are exercisable at $.20 per share at any time through June 30, 2004.
USA has agreed to register the shares and the shares underlying the warrants
under the Act for resale for a period of 2 years. The securities were offered
and sold under the exemption from registration set forth in Rule 506 promulgated
under the Act. All of the noteholders are accredited investors and there was no
general solicitation or advertising.
F-35
TABLE OF CONTENTS
Report of Independent Auditors. F-37
Balance Sheets as of December 31, 2001 and 2000. F-38
Statements of Operations for the years ended December 31, 2001 and 2000. F-39
Statements of Stockholders` Equity for the years ended December 31, 2001 and 2000. F-40
Statements of Cash Flows for the years ended December 31, 2001 and 2000. F-41
Notes to Financial Statements. F-42
Unaudited Financial Statements:
Balance Sheets as of March 31, 2002 and 2001 (Unaudited). F-53
Statements of Operations for the three months ended March 31, 2002
and 2001 (Unaudited). F-54
Statements of Stockholders` Equity (Deficit) for the three months
ended March 31, 2002 (Unaudited). F-55
Statements of Cash Flows for the three months ended March 31, 2002
and 2001 (Unaudited). F-56
Selected Notes to Financial Statements (Unaudited). F-57
Pro Forma Financial Information (Unaudited):
Pro Forma Consolidated Balance Sheet as of March 31, 2002 (Unaudited). F-62
Pro Forma Consolidated Statement of Operations for the year ended
June 30, 2001 (Unaudited). F-62
Pro Forma Consolidated Statement of Operations for the nine months ended
March 31, 2002 (Unaudited). F-63
Pro Forma Notes to Consolidated Financial Statements (Unaudited) F-64
F-36
Report of Independent Auditors
The Board of Directors
Stitch Networks Corporation
We have audited the accompanying balance sheets of Stitch Networks Corporation
(formerly e-Vend.net Corporation) as of December 31, 2001 and 2000, and the
related statements of operations, stockholders` equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company`s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stitch Networks Corporation at
December 31, 2001 and 2000, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming Stitch
Networks Corporation will continue as a going concern. As discussed in Note 2 to
the financial statements, the Company has never been profitable, continues to
incur losses from operations, and anticipates that it will require additional
debt or equity financing which may not be readily available. These matters raise
substantial doubt about the Company`s ability to continue as a going concern.
Management`s plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
June 28, 2002,
except for paragraph 3 of Note 11,
as to which the date is July 26, 2002
F-37
Stitch Networks Corporation
Balance Sheets
December 31
2001 2000
---------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,436,308 $ 7,079,397
Accounts receivable, net of allowance for doubtful accounts of
$3,600 at December 31, 2001 and 2000 132,160 10,487
Inventory 235,000 49,532
Other 88,604 131,923
---------------------------------------
Total current assets 2,892,072 7,271,339
Property and equipment, net 1,626,212 1,986,094
Other assets 32,638 9,027
---------------------------------------
Total assets $ 4,550,922 $ 9,266,460
=======================================
Liabilities and stockholders` equity
Current liabilities:
Accounts payable $ 724,117 $ 182,778
Accrued expenses 218,773 123,051
Due to related party, net 5,888 8,875
Current portion of long-term debt 2,386,506 147,238
---------------------------------------
Total current liabilities 3,335,284 461,942
Long-term debt, net of current portion 424,331 2,077,849
Stockholders` equity:
Series A convertible preferred stock, $.01 par value; 3,114,637 shares
authorized, issued and outstanding; liquidation value of
$2,383,476 at December 31, 2001 31,146 31,146
Series B convertible preferred stock, $.01 par value; 5,276,895
shares authorized, issued and outstanding; liquidation value of
$11,483,885 at December 31, 2001 52,769 52,769
Common stock, $.01 par value; 17,000,000 shares authorized at
December 31, 2001 and 16,000,000 shares authorized at
December 31, 2000; 6,000,000 shares issued and outstanding 60,000 60,000
Additional paid-in capital 14,619,244 14,611,985
Accumulated deficit (13,971,852) (8,029,231)
---------------------------------------
Total stockholders` equity 791,307 6,726,669
---------------------------------------
Total liabilities and stockholders` equity $ 4,550,922 $ 9,266,460
=======================================
See accompanying notes.
F-38
Stitch Networks Corporation
Statements of Operations
Year ended December 31
2001 2000
-----------------------------------------
Revenue $ 1,003,241 $ 219,982
Operating expenses:
Cost of revenue 1,149,620 142,249
Compensation 3,085,946 2,256,751
General and administrative 730,811 754,001
Research and development 746,814 647,400
Sales and marketing 442,447 299,693
Depreciation and amortization 779,285 576,228
-----------------------------------------
Total operating expenses 6,934,923 4,676,322
-----------------------------------------
(5,931,682) (4,456,340)
Other income (expense):
Interest income 191,703 547,642
Interest expense (197,314) (128,314)
Other, net (5,328) (24,135)
-----------------------------------------
(10,939) 395,193
-----------------------------------------
Net loss $ (5,942,621) $ (4,061,147)
=========================================
See accompanying notes.
F-39
Stitch Networks Corporation
Statements of Stockholders` Equity
Years ended December 31, 2001 and 2000
Preferred Stock
---------------------------------------------
Series A Convertible Series B Convertible Common Stock Additional Total
------------------------------------------------------------- Paid-In Accumulated Stockholders`
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
-----------------------------------------------------------------------------------------------------
Balance, December 31, 1999 3,114,637 $31,146 5,276,895 $52,769 6,000,000 $60,000 $14,604,726 $ (3,968,084) $10,780,557
Compensation expense
relating to options issued
to nonemployees - - - - - - 7,259 - 7,259
Net loss - - - - - - - (4,061,147) (4,061,147)
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2000 3,114,637 31,146 5,276,895 52,769 6,000,000 60,000 14,611,985 (8,029,231) 6,726,669
Compensation expense
relating to options issued
to nonemployees - - - - - - 7,259 - 7,259
Net loss - - - - - - - (5,942,621) (5,942,621)
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2001 3,114,637 $31,146 5,276,895 $52,769 6,000,000 $60,000 $14,619,244 $(13,971,852) $ 791,307
==================================================================================================================================
See accompanying notes.
F-40
Stitch Networks Corporation
Statements of Cash Flows
Year ended December 31
2001 2000
---------------------------------------------
Cash flows from operating activities
Net loss $ (5,942,621) $ (4,061,147)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 779,285 576,228
Non-cash stock compensation expense 7,259 7,259
Loss on disposal of property and equipment 127,859 49,709
Changes in operating assets and liabilities:
Accounts receivable (121,673) 17,891
Inventory (185,468) 69,381
Other current assets 43,319 (37,319)
Accounts payable 541,339 (60,804)
Accrued expenses 95,722 62,802
Due to related party, net (2,987) (8,045)
Other assets (23,611) -
---------------------------------------------
Net cash used in operating activities (4,681,577) (3,384,045)
Cash flows from investing activities
Purchase of property and equipment (547,262) (1,987,441)
---------------------------------------------
Net cash used in investing activities (547,262) (1,987,441)
Cash flows from financing activities
Borrowings of long-term debt 706,322 2,000,000
Repayments of long-term debt (120,572) (136,448)
---------------------------------------------
Net cash provided by financing activities 585,750 1,863,552
---------------------------------------------
Net decrease in cash and cash equivalents (4,643,089) (3,507,934)
Cash and cash equivalents at beginning of year 7,079,397 10,587,331
---------------------------------------------
Cash and cash equivalents at end of year $ 2,436,308 $ 7,079,397
=============================================
Supplemental disclosures of cash flow information:
Interest paid $ 205,727 $ 111,717
=============================================
See accompanying notes.
F-41
Stitch Networks Corporation
Notes to Financial Statements
December 31, 2001 and 2000
1. Description of Business
Stitch Networks Corporation (the Company), a Delaware corporation, was
incorporated in February 1996 as Goodvest Corporation and, in March 1999,
changed its name to e-Vend.net Corporation. In June 2001 the Company changed its
name to Stitch Networks Corporation. The Company designs and employs embedded
connectivity solutions that enable network servers to monitor and control
vending machines and appliances over the internet. The Company`s customers are
principally located in the United States.
On December 31, 2000, the Company executed a Vending Placement, Supply and
Distribution Agreement (the Agreement) with Eastman Kodak Company, Maytag
Corporation and Dixie Narco, Inc., which formed a strategic alliance to market
and execute a national vending program for the sale of one-time use camera and
film products. The Agreement provides for an initial term of three years ending
December 31, 2003, with additional provisions for early termination and
extensions as defined. Furthermore, the Agreement also provides for exclusivity
among the parties for the term of the Agreement relating to the sale of camera
and film products from vending machines within the Continental United States.
This agreement represented the majority of the Company`s operations in 2001.
2. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction on liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustments to recorded
asset values that might be necessary should the Company be unable to continue in
existence. The Company has never been profitable, has incurred net losses of
$5.9 million and $4.1 million during the years ending December 31, 2001 and
2000, respectively, and cumulative losses from its inception through December
31, 2001 amounting to approximately $14.0 million. Losses have continued through
June 2002 and are expected to continue throughout 2002. The Company`s ability to
meet its future obligations is dependent upon the success of its products in the
marketplace and its ability to raise capital, which may not be readily
available, until the Company`s products can generate sufficient operating
revenues.
F-42
2. Summary of Significant Accounting Policies (continued)
These factors raise substantial doubt about the Company`s ability to continue as
a going concern. Management believes that actions presently being taken will
allow for the Company to continue as a going concern. Such actions include the
generation of revenues from operations, a restructuring of the Company`s cost
structure which includes reductions in personnel and facility costs and
additional financing activities.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes all highly liquid investments purchased with
an original maturity of three months or less.
Inventory
Inventory, which principally consists of finished goods, components, and
packaging materials, is stated at the lower of cost (first in, first out basis)
or market.
F-43
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives. Leasehold improvements are
recorded at cost and are amortized on a straight-line basis over the shorter of
the estimated useful life of the asset or the related lease term. The estimated
useful lives are as follows:
Vending machines and related components 3 to 7 years
Computers and purchased software 3 years
Equipment and furniture 5 to 7 years
Leasehold improvements 3 years
Long-Lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, the Company periodically
evaluates the carrying value of long-lived assets when events and circumstances
warrant such review. The carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flow from such asset is
separately identifiable and is less than the carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined by
using the anticipated cash flows discounted at a rate commensurate with the risk
involved. Measurement of the impairment, if any, will be based upon the
difference between carrying value and the fair value of the asset.
Financial Instruments
The Company`s financial instruments principally consist of cash and cash
equivalents, accounts receivable, and accounts payable and debt. Cash and cash
equivalents, accounts receivable and accounts payable are carried at cost, which
approximates fair value because of the short maturity of these instruments. The
Company`s debt is carried at cost, which approximates fair value, as the debt
bears interest at rates approximating current market rates.
F-44
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Revenue from the sale of products from the Company`s vending machines is
recognized upon the sale of such products and acceptance by the customer.
Monthly service fees are recognized for the use of vending machines and
access to the Company`s network.
Research and Development
The Company expenses research and development costs as incurred.
Income Taxes
The Company uses the liability method to account for income taxes. Accordingly,
deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts reportable for income tax purposes.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense for the years
ended December 31, 2001 and 2000 was approximately $155,000 and $121,000,
respectively.
Accounting for Stock Options
Financial Accounting Standards Board Statement ("SFAS") No. 123, Accounting for
Stock Based Compensation, provides companies with a choice to follow the
provisions of SFAS 123 in determination of stock-based compensation expense or
to continue with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). The Company has elected to
follow the provisions of APB 25. Under APB 25, if the exercise price of the
Company`s stock options equals or exceeds the market price of the underlying
Common Stock on the date of grant, no compensation expense is recognized. The
effect of applying SFAS No. 123 to the Company`s stock-based awards results in
net loss that is not materially different from the reported net loss.
F-45
2. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements
The FASB recently issued Statement No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets, that is applicable to financial statements issued
for fiscal years beginning after December 15, 2001. The FASB`s new rules on
asset impairment supersede FASB Statement 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and portions of
APB Opinion 30, Reporting the Results of Operations. This Standard provides a
single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in the period in
which the losses are incurred, rather than as of the measurement date as
presently required. The provisions of this Standard are not expected to have an
effect on the Company`s financial position or results of operations.
3. Property and Equipment
Property and equipment consist of the following:
December 31
2001 2000
------------------------------------
Vending machines and related components $ 1,034,099 $ 774,503
Computers and purchased software 1,518,079 1,477,243
Equipment and furniture 453,218 477,332
Leasehold improvements and other 210,288 255,197
------------------------------------
3,215,684 2,984,275
Less accumulated depreciation and amortization 1,589,472 998,181
------------------------------------
$ 1,626,212 $ 1,986,094
====================================
4. Accrued Expenses
Accrued expenses consist of the following:
December 31
2001 2000
-----------------------------------
Professional fees $ 63,373 $ 56,000
Interest payable 10,519 18,932
Sales tax payable 26,686 3,826
Delivery costs 41,539 5,871
Other 76,656 38,422
-----------------------------------
$ 218,773 $ 123,051
===================================
F-46
5. Long-Term Debt
In July 1998, the Company obtained a $425,000 Bank Loan (Loan) for working
capital purposes. The Loan bore interest at 7.5% and was repayable in 36 equal
monthly installments with a due date of June 1, 2002. The Loan was
collateralized by substantially all of the Company`s assets and was personally
guaranteed by the Company`s President and Chief Executive Officer.
In May 2000, the Company obtained a $2,000,000 Equipment Line of Credit (Line of
Credit) from a bank to fund the purchase of property and equipment. As of
December 31, 2000, $2,000,000 was outstanding under the Line of Credit. The Line
of Credit bore interest at a variable rate based on the bank`s prime rate and
was due on May 1, 2002, with interest only due on a monthly basis in the
interim. This loan was collateralized by substantially all of the Company`s
assets.
In May 2001, the $2,000,000 outstanding principal on the Line of Credit and the
$165,042 outstanding balance on the Loan were restructured and combined into a
single Loan (New Loan). The New Loan bears interest at a variable rate based on
the bank`s prime rate, and is due in full in June 2002, with interest payable
monthly. The personal guarantee of the President was removed from any and all
bank debt, and the collateral was replaced by an assignment of the Company`s
brokerage account containing the equivalent amount of cash and cash equivalents.
The New Loan balance of $2,165,042 was repaid in accordance with its terms in
June 2002. In connection with this borrowing arrangement, the Company was also
granted additional borrowing capacity in the form of a $50,000 loan commitment.
The $50,000 commitment was utilized during February 2002 (see Note 11).
F-47
5. Long-Term Debt (continued)
In May 2001, the Company obtained from a separate bank a borrowing facility (the
Facility) in the aggregate amount of approximately $1,500,000 to fund the
purchase of vending machines used for the distribution and sale of Kodak film
products. Borrowings are made from time to time under the facility, with
repayment schedules set at the time of each borrowing, including equal monthly
payments over 36 months and an interest rate based upon an amount in excess of
three year U.S. Treasury Notes. The outstanding principal balance under this
facility was $645,795 as of December 31, 2001. The Company has granted the bank
a security interest in the specific film products vending machines. Repayment of
principal is also insured by a Surety Bond issued by a third-party insurer in
exchange for an initial fee paid by the Company. Subsequent to December 31, 2001
and through April 2002, the Company borrowed an additional $779,111 under this
facility.
Long-term debt consists of the following:
December 31
2001 2000
---------------------------------
New loan $ 2,165,042 $ -
Borrowing facility 645,795 -
Equipment line of credit - 2,000,000
Bank loan - 225,087
---------------------------------
2,810,837 2,225,087
Less current portion (2,386,506) (147,238)
---------------------------------
$ 424,331 $ 2,077,849
=================================
6. Stockholders` Equity
Holders of the Series A and Series B Preferred Stock have the option to convert
such shares into shares of Common Stock on a one-to-one ratio, subject to
certain exceptions. The conversion rate on a particular series of Preferred
Stock is subject to an adjustment in the event that any additional Common Stock,
or other shares convertible into Common Stock, are issued for a per-share price
less than the particular series conversion price. The Series A and Series B
Preferred Stockholders vote on an as-if-converted basis. Mandatory conversion
occurs upon the closing of an initial public offering of the Company`s Common
Stock, as defined. The holders of the Series A and Series B also have demand and
piggyback registration rights, as defined. The Series A and Series B rank
paripassu in liquidation, and the holders of non-cumulative Series A and Series
B are each entitled to receive an amount equal to their initial investment plus
any declared but unpaid dividends and 7% of the initial investment amount
compounded annually from the date of investment prior to distribution to the
common shareholders.
F-48
7. Income Taxes
At December 31, 2001, the Company has approximately $10,900,000 ($5,215,000 in
2000) and $11,400,000 ($5,615,000 in 2000) of net operating loss carryforwards
for federal and state income tax purposes, respectively. The federal operating
loss carryforwards will begin expiring in 2019, and the state operating loss
carryforwards expire principally between 2005 and 2020. At December 31, 2001 and
2000, the Company recorded a deferred tax asset of approximately $4,503,100 and
$2,122,200, respectively, which was reduced by a valuation allowance of the same
amount, as the realization of the deferred tax asset is not certain.
Significant components of the Company`s deferred tax asset is as follows:
December 31
2001 2000
-----------------------------------
Deferred tax asset:
Net operating loss carryforwards $ 4,460,700 $ 2,120,700
Other 42,400 1,500
-----------------------------------
4,503,100 2,122,200
Valuation allowance (4,503,100) (2,122,200)
-----------------------------------
Net deferred tax asset $ - $ -
===================================
The timing and extent in which the Company can utilize future tax deductions in
any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations.
8. Stock Option Plan
In March 1999, the Company adopted the 1999 Equity Compensation Plan (the Plan),
which provides for the granting of stock options, restricted stock and stock
appreciation rights (SARs) to employees, directors and consultants of the
Company. Options granted under the Plan may be either Incentive Stock Options
(ISOs) or Nonqualified Stock Options (NSOs). ISOs may be granted only to Company
employees (including officers and directors who are also employees). NSOs may be
granted to employees, directors and consultants. At December 31, 2001, the
Company reserved 2,559,059 shares of common stock for issuance under the Plan.
Options under the Plan are granted for periods of up to ten years and generally
vest over four years. All options are subject in general to earlier termination
if the optionee leaves the employ of the Company. To date, no restricted stock
or SARs have been issued under the Plan.
The Company does not recognize compensation expense on the issuance of its stock
options to employees and directors when the option terms are fixed and the
exercise price equals the fair value of the underlying stock on the grant date.
To date, all options issued to employees under the Plan have been ISOs and all
are exercisable at a price not less than the fair value of the Common Stock at
the date of the grant. Accordingly, no compensation expense has been recognized.
F-49
8. Stock Option Plan (continued)
The following summarizes the activity of the Plan since its adoption:
Common
Shares
Under Weighted
Options Average
Granted Exercise Price
--------------------------------------
Outstanding at December 31, 1999 769,000 $ 0.67
Granted 428,000 1.89
Cancelled/forfeited (12,109) 0.67
--------------------------------------
Outstanding at December 31, 2000 1,184,891 1.41
Granted 229,500 1.89
Cancelled/forfeited (424,121) 1.74
--------------------------------------
Outstanding at December 31, 2001 990,270 $ 0.97
======================================
Information with respect to options outstanding under the Plan as of December
31, 2001 is as follows:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Exercise Outstanding at Remaining Average Outstanding at Average
Price December 31 Contractual Exercise December 31 Exercise
Range 2001 Life (Years) Price 2001 Price
- --------------------------------------------------------------------------------------------------------
$ .67 702,000 7.3 $ 0.67 618,927 $ 0.67
$ 1.89 288,270 8.6 $ 1.89 112,123 $ 1.89
------------------- ------------------
990,270 731,050
=================== ==================
Included in the 2001 options outstanding at December 31, 2001 are 35,770 stock
options granted to a nonemployee. The fair value of the options granted to the
nonemployee is recognized as an expense over the period that the nonemployee
provides services. The total expense for these options in each of the years
ended December 31, 2001 and 2000 was $7,259.
F-50
9. Commitments and Contingencies
The Company leases various properties under operating leases expiring at various
times through 2006. The aggregate minimum annual lease payments under the
noncancelable operating leases as of December 31, 2001, are as follows:
2002 $163,400
2003 146,400
2004 143,800
2005 38,600
2006 1,400
--------
Total $493,600
========
Total rental expense for 2001 and 2000 was approximately $206,000 and $224,000,
respectively.
In normal course of business, various legal actions and claims are pending or
may be instituted or asserted in the future against the Company. The Company
does not believe that the resolution of these matters will have a material
effect on the financial position or results of operations of the Company.
10. Related-Party Transactions
During the years 2001 and 2000, the Company purchased vending machines from
Dixie-Narco, Inc. (Dixie), a wholly-owned subsidiary of a shareholder of the
Company. Total purchases from Dixie for the years ended December 31, 2001 and
2000 were $661,000 and $35,000, respectively. Amounts due to related party in
the accompanying 2001 balance sheet represents the net amount owed to Dixie
under the terms of the Dixie agreement.
F-51
11. Subsequent Events
On May 14, 2002, USA Acquisition Corp., a wholly-owned subsidiary of USA
Technologies merged with and into Stitch Networks Corporation (Stitch) pursuant
to an Agreement and Plan of Merger by and among USA Technologies, Inc., USA
Acquisition Corp., Stitch and the stockholders of Stitch dated April 10, 2002.
At the close of the transaction, Stitch became a wholly owned subsidiary of USA
Technologies, Inc.
All of the outstanding shares of stock of Stitch were converted into the right
to receive an aggregate of 22,762,341 shares of Common Stock of USA
Technologies, Inc. and warrants to purchase up to 7,587,447 shares of Common
Stock of USA Technologies, Inc. at $.40 per share at any time through June 30,
2002. Additionally, USA Technologies, Inc. assumed outstanding Stitch stock
options which were converted into options to purchase an aggregate of 2,475,318
shares of Common Stock of USA Technologies, Inc. at $.165 per share at any time
prior to May 14, 2007 and warrants identical to those issued to the stockholders
to purchase up to 412,553 shares of Common Stock of USA Technologies, Inc. A
total of 4,800,000 of the shares of Common Stock issued to the former
stockholders of Stitch are being held in escrow in order to secure the former
stockholders` indemnification obligations under the Agreement and Plan of Merger
and are subject to cancellation.
On January 9, 2002, the Company obtained a $225,000 loan from a bank to fund
working capital. The loan was payable to the bank on July 8, 2002. On February
26, 2002, the Company borrowed an additional $50,000 from the same bank which
was payable on demand. On July 26, 2002 the bank agreed to extend the due dates
on the $225,000 loan and $50,000 loan to September 1, 2002, provided the Company
pay the bank the July and August interest payments on such loans and a $6,750
extension fee.
F-52
Stitch Networks Corporation
Balance Sheets
(Unaudited)
March 31
2002 2001
--------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,174,857 $ 5,773,807
Accounts receivable, net of allowance for doubtful accounts of
$5,224 and $11,818 at March 31, 2002 and 2001, respectively 113,927 78,254
Inventory 227,966 460,845
Due from related party, net 57,469 -
Other 34,550 62,273
--------------------------------
Total current assets 2,608,769 6,375,179
Property and equipment, net 1,520,554 1,782,305
Other assets 32,638 9,027
--------------------------------
Total assets $ 4,161,961 $ 8,166,511
================================
Liabilities and stockholder`s equity (deficit)
Current liabilities:
Accounts payable $ 650,525 $ 590,358
Accrued expenses 300,791 118,948
Current portion of long-term debt 2,706,088 111,415
--------------------------------
Total current liabilities 3,657,404 820,721
Long-term debt, net of current portion 629,910 2,077,849
Stockholder`s equity (deficit):
Series A convertible preferred stock, $.01 par value; 3,114,637
shares authorized, issued and outstanding; liquidation value of
$2,425,186 (unaudited) at March 31, 2002 31,146 31,146
Series B convertible preferred stock, $.01 par value; 5,276,895
shares authorized, issued and outstanding; liquidation value of
$11,684,853 (unaudited) at March 31, 2002 52,769 52,769
Common stock, $.01 par value; 17,000,000 shares authorized;
6,000,000 shares issued and outstanding 60,000 60,000
Additional paid-in capital 14,626,505 14,611,985
Accumulated deficit (14,895,773) (9,487,959)
--------------------------------
Total stockholders` equity (deficit) (125,353) 5,267,941
--------------------------------
Total liabilities and stockholders` equity (deficit) $ 4,161,961 $ 8,166,511
================================
See accompanying notes.
F-53
Stitch Networks Corporation
Statements of Operations
(Unaudited)
Three months ended March 31
2002 2001
-------------------------------------
Revenue $ 368,928 $ 94,346
Operating expenses:
Cost of revenue 230,203 42,826
Compensation 483,151 756,465
General and administrative 156,396 273,920
Research and development 136,622 192,453
Sales and marketing 45,884 134,689
Depreciation and amortization 199,628 205,909
-------------------------------------
Total operating expenses 1,251,884 1,606,262
-------------------------------------
(882,956) (1,511,916)
Other income (expense):
Interest income 6,937 87,339
Interest expense (48,786) (51,345)
Other, net 884 17,194
-------------------------------------
(40,965) 53,188
-------------------------------------
Net loss $ (923,921) $ (1,458,728)
=====================================
See accompanying notes.
F-54
Stitch Networks Corporation
Statements of Stockholders` Equity (Deficit)
Three months ended March 31, 2002
(Unaudited)
Preferred Stock
---------------------------------------------
Series A Convertible Series B Convertible Common Stock Additional Total
------------------------------------------------------------- Paid-In Accumulated Stockholders`
Shares Amount Shares Amount Shares Amount Capital Deficit Equity (Deficit)
--------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 3,114,637 $31,146 5,276,895 $52,769 6,000,000 $60,000 $14,619,244 $(13,971,852) $791,307
Compensation expense relating
to options issued to
nonemployees - - - - - - 7,261 - 7,261
Net loss - - - - - - - (923,921) (923,921)
-----------------------------------------------------------------------------------------------------
Balance, March 31, 2002 3,114,637 $31,146 5,276,895 $52,769 6,000,000 $60,000 $14,626,505 $(14,895,773) $(125,353)
========= ======= ========= ======= ========= ======= =========== ============ =========
See accompanying notes.
F-55
Stitch Networks Corporation
Statements of Cash Flows
(Unaudited)
Three months ended March 31
2002 2001
------------------------------------
Cash flows from operating activities
Net loss $ (923,921) $ (1,458,728)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 199,628 205,909
Non-cash stock compensation expense 7,261 -
Loss on disposal of property and equipment - 17,344
Changes in operating assets and liabilities:
Accounts receivable 18,233 (67,767)
Inventory 7,034 (411,313)
Other assets 54,054 69,650
Accounts payable (73,592) 407,580
Accrued expenses 82,018 (4,103)
Due to/from related party (63,357) (8,875)
------------------------------------
Net cash used in operating activities (692,642) (1,250,303)
Cash flows from investing activities
Purchase of property and equipment (93,970) (19,464)
------------------------------------
Net cash used in investing activities (93,970) (19,464)
Cash flows from financing activities
Borrowings of long term debt 587,287 -
Repayments of long term debt (62,126) (35,823)
------------------------------------
Net cash provided by (used in) financing activities 525,161 (35,823)
------------------------------------
Net decrease in cash and cash equivalents (261,451) (1,305,590)
Cash and cash equivalents, beginning of period 2,436,308 7,079,397
------------------------------------
Cash and cash equivalents, end of period $ 2,174,857 $ 5,773,807
====================================
Supplemental disclosures of cash flow information:
Interest paid $ 48,950 $ 53,165
====================================
See accompanying notes.
F-56
Stitch Networks Corporation
Selected Notes to Financial Statements
Three months ended March 31, 2002 and 2001
(Unaudited)
1. Description of Business
Stitch Networks Corporation (the Company), a Delaware corporation was
incorporated in February 1996 as Goodvest Corporation and, in March 1999,
changed its name to e-Vend.net Corporation. In June 2001 the Company changed its
name to Stitch Networks Corporation. The Company designs and employs embedded
connectivity solutions that enable network servers to monitor and control
vending machines and appliances over the internet. The Company`s customers are
principally located in the United States.
On December 31, 2000, the Company executed a Vending Placement, Supply and
Distribution Agreement (the Agreement) with Eastman Kodak Company, Maytag
Corporation and Dixie Narco, Inc., in order to form a strategic alliance to
market and execute a national vending program for the sale of one-time use
camera and film products. The Agreement provides for an initial term of three
years ending December 31, 2003, with additional provisions for early termination
and extensions as defined. Furthermore, the Agreement also provides for
exclusivity among the parties for the term of the Agreement relating to the sale
of camera and film products from vending machines within the Continental United
States. This agreement represents the majority of the Company`s operations in
2001 and during the first quarter of 2002.
2. Summary of Significant Accounting Policies
Interim Financial Information
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary have been included. Operating
results for the three month period ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-57
2. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash and cash equivalents includes all highly liquid investments purchased with
original maturity of three months or less.
Inventory
Inventory, which consists of finished goods, components, and packaging
materials, is stated at the lower of cost (first in, first out basis) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Leasehold improvements
are recorded at cost and amortized on a straight-line basis over the shorter of
the estimated useful life of the asset or the related lease term. The estimated
useful lives are as follows:
Vending machines and related components 3 to 7 years
Computers and purchased software 3 years
Equipment and furniture 5 to 7 years
Leasehold improvements 3 years
Revenue Recognition
Revenue from the sale of products from the Company`s vending machines is
recognized upon the sale of such products and acceptance by the customer.
Monthly fees for the use of vending machines equipped with embedded internet
connectivity is recognized upon usage of the equipment.
Research and Development
The Company expenses research and development costs as incurred.
3. Property and Equipment
Property and equipment consist of the following:
March 31
2002 2001
-------------------------------------
Vending machines and related components $ 1,131,063 $ 775,048
Computers and purchased software 1,518,079 1,501,760
Equipment and furniture 444,242 451,819
Leasehold improvements and other 207,748 199,854
-------------------------------------
3,301,132 2,928,481
Less accumulated depreciation and amortization 1,780,578 1,146,176
-------------------------------------
$ 1,520,554 $ 1,782,305
=====================================
F-58
4. Long-Term Debt
During the period from January 2002 to April 2002 the Company borrowed
approximately $779,000 under their borrowing facility to fund the purchase of
vending machines used for the distribution and sale of Kodak film products.
These borrowings are being repaid in accordance with the repayment schedules set
at the time of each borrowing, including equal monthly payments over periods
ranging from 31 to 36 months and an interest rate based upon an amount in excess
of three year U.S. Treasury Notes.
On January 9, 2002, the Company obtained a $225,000 loan from a bank to fund
working capital. The loan was payable to the bank on July 8, 2002. On February
26, 2002, the Company borrowed an additional $50,000 from the same bank which
was payable on demand. On July 26, 2002 the bank agreed to extend the due dates
on the $225,000 loan and $50,000 loan to September 1, 2002, provided the Company
pay the bank the July and August interest payments on such loans and a $6,750
extension fee.
5. Related-Party Transactions
During the three months ended March 31, 2002 and 2001, the Company purchased
vending machines from Dixie-Narco, Inc. (Dixie), a wholly-owned subsidiary of a
shareholder of the Company. Total purchases from Dixie for the quarter ended
March 31, 2002 and 2001 were $156,571 and $1,321, respectively. Amounts due from
related party in the accompanying balance sheet represents the net amount due
from Dixie under the terms of the Dixie agreement.
6. Subsequent Events
On May 14, 2002, USA Acquisition Corp., a wholly-owned subsidiary of USA
Technologies merged with and into Stitch Networks Corporation (Stitch) pursuant
to an Agreement and Plan of Merger by and among USA Technologies, Inc., USA
Acquisition Corp., Stitch and the stockholders of Stitch dated April 10, 2002.
At the close of the transaction, Stitch became a wholly owned subsidiary of USA
Technologies, Inc.
All of the outstanding shares of stock of Stitch were converted into the right
to receive an aggregate of 22,762,341 shares of Common Stock of USA
Technologies, Inc. and warrants to purchase up to 7,587,447 shares of Common
Stock of USA Technologies, Inc. at $.40 per share at any time through June 30,
2002. None of these warrants were exercised and these warrants have expired.
Additionally, USA Technologies, Inc. assumed outstanding Stitch stock options
which were converted into options to purchase an aggregate of 2,475,318 shares
of Common Stock of USA Technologies, Inc. at $.165 per share at any time prior
to May 14, 2007 and warrants identical to those issued to the stockholders to
purchase up to 412,553 shares Common Stock of USA Technologies, Inc. A total of
4,800,000 of the shares of the Common Stock issued to the former stockholders of
Stitch are being held in escrow in order to secure the former stockholders`
indemnification obligations under the Agreement and Plan of Merger and are
subject to cancellation.
The management of USA Technologies, Inc. has taken measures to reduce costs at
Stitch subsequent to the acquisition date. Head count has been significantly
reduced and a consultant has been engaged to sublet the Stitch facility.
Operating costs are also being reduced as the two operations integrate under one
facility.
F-59
USA Technologies Inc.
Unaudited Pro Forma Consolidated Financial Statements
Basis of Presentation
The Pro Forma Consolidated Balance Sheet as of March 31, 2002, the Pro Forma
Consolidated Statement of Operations for the nine months ended March 31, 2002,
and the Pro Forma Consolidated Statement of Operations for the year ended June
30, 2001, are based on the historical financial statements of USA Technologies,
Inc. (USA) and Stitch Networks Corporation (Stitch). The acquisition of Stitch
has been accounted for using the purchase method of accounting. The Pro Forma
Consolidated Balance Sheet as of March 31, 2002 has been prepared assuming the
Stitch acquisition was completed March 31, 2002. The Pro Forma Consolidated
Statement of Operations for the nine months ended March 31, 2002 has been
prepared assuming the Stitch acquisition was completed on July 1, 2001. The Pro
Forma Consolidated Statement of Operations for the year ended June 30, 2001 has
been prepared assuming that the Stitch acquisition was completed on July 1,
2000.
The Unaudited Pro Forma financial statement information is presented for
informational purposes only. The Pro Forma Consolidated Balance Sheet and
Statements of Operations do not purport to represent what USA`s actual financial
position or results of operations would have been had the acquisition of Stitch
occurred as of such dates, or to project USA`s financial position or results of
operations for any period or date, nor does it give effect to any matters other
than those described in the notes thereto. In addition, the allocations of
purchase price to the assets and liabilities of Stitch are preliminary and the
final allocations may differ from the amounts reflected herein. The Unaudited
Pro Forma Consolidated Balance Sheet and Unaudited Pro Forma Statements of
Operations should be read in conjunction with USA`s financial statements and
notes thereto, and the historical financial statements of Stitch which are
included elsewhere on this current report on Form 8-K.
F-60
USA Technologies Inc.
Pro Forma Consolidated Balance Sheet
March 31, 2002
(Unaudited)
Acquisition
Stitch USA Adjustments Pro Forma
------ ---- ----------- ---------
Assets:
Current assets:
Cash and cash equivalents $2,174,857 $1,328,455 - $ 3,503,312
Accounts receivable, net 113,927 237,047 - 350,974
Due from related party 57,469 - - 57,469
Inventory 227,966 876,765 - 1,104,731
Subscriptions receivable - 79,237 - 79,237
Prepaid expenses and other current assets 34,550 899,214 - 933,764
---------------------------------------------------------
Total current assets 2,608,769 3,420,718 - 6,029,487
Property and equipment, net 1,520,554 576,939 - 2,097,493
Software development costs - 5,326,186 - 5,326,186
Goodwill - - (1) 5,386,999 5,386,999
Intangible assets - - (1) 3,268,000 3,268,000
Other assets 32,638 408,215 - 440,853
---------------------------------------------------------
Total assets $4,161,961 $9,732,058 $8,654,999 $22,549,018
=========================================================
Liabilities and shareholder`s equity
Current liabilities:
Accounts payable $ 650,525 $2,118,063 - $2,768,588
Accrued expenses 300,791 1,346,017 - 1,646,808
Equipment line of credit - 34,632 - 34,632
Current portion of long-term debt 2,706,088 58,113 - 2,764,201
---------------------------------------------------------
Total current liabilities 3,657,404 3,556,825 - 7,214,229
Long-term debt, less current portion 629,910 4,605,370 - 5,235,280
Convertible debentures, less current portion - 51,667 - 51,667
Shareholders` equity:
Series A convertible preferred stock, no par value;
1,800,000 shares authorized; 540,789 issued and
outstanding at March 31, 2002 (Unaudited) 83,915 3,830,628 (1) (83,915) 3,830,628
Stitch Common Stock, $.01 par value; 17,000,000 shares
authorized; 6,000,000 shares issued and outstanding at
March 31, 2002 (Unaudited) 60,000 - (1) (60,000) -
USA Common Stock, no par value; 85,000,000 shares
authorized; 39,787,136 issued and outstanding shares at
March 31, 2002 (Unaudited) 14,626,505 45,252,955 (1)(14,626,505) 45,252,955
Deferred compensation - (25,750) - (25,750)
Additional paid-in-capital - - (1) 8,529,646 8,529,646
Accumulated deficit (14,895,773) (47,539,637) (1)14,895,773 (47,539,637)
---------------------------------------------------------
Total shareholders` equity (deficit) (125,353) 1,518,196 8,654,999 10,047,842
---------------------------------------------------------
Total liabilities and shareholders` equity $4,161,961 $9,732,058 $8,654,999 $22,549,018
=========================================================
See Notes to Unaudited Pro Forma Consolidated Financial Statements
F-61
USA Technologies, Inc.
Pro Forma Consolidated Statement of Operations
For the year ended June 30, 2001
(Unaudited)
Acquisition
Stitch USA Adjustments Pro Forma
------ --- ----------- ---------
Revenues $ 502,248 $ 1,451,002 - $ 1,953,250
Operating expenses:
Cost of sales 318,067 816,239 - 1,134,306
General and administrative 1,298,648 4,666,636 - 5,965,284
Compensation 3,009,020 2,966,776 - 5,975,796
Research and development 761,078 961,378 - 1,722,456
Depreciation and amortization 828,059 209,646 - 1,364,505
Total operating expenses 6,214,872 9,620,675 (2) 326,800 16,162,347
------------ ------------ ---------- ------------
(5,712,624) (8,169,673) (326,800) (14,209,097)
Other income (expense):
Interest income 410,968 60,034 - 471,002
Interest expense (199,495) (1,122,505) - (1,322,000)
Other, net 7,037 (40,100) - (33,063)
------------ ------------ ---------- ------------
Total other income (expense) 218,510 (1,102,571) - (884,061)
Loss before cumulative effect of accounting change
and extraordinary item (5,494,114) (9,272,244) (2)(326,800) (15,093,158)
Cumulative effect of accounting change - (821,000) - (821,000)
------------ ------------ ---------- ------------
Loss before extraordinary item (5,494,114) (10,093,244) (326,800) (15,914,158)
Extraordinary loss on exchange of debt - (863,000) - (863,000)
------------ ------------ ---------- ------------
Net loss (5,494,114) (10,956,244) (326,800) (16,777,158)
Cumulative preferred dividends - (836,541) - (836,541)
------------ ------------ ---------- ------------
Loss applicable to common shares $ (5,494,114) $(11,792,785) $ (326,800) $(17,613,699)
============ ============ ========== ============
Loss per common share (basic and diluted) $(0.70) $(0.44)
====== ======
Weighted average number of common shares
outstanding (basic and diluted) 16,731,999 23,637,341 40,369,340
=========== ========== ===========
F-62
USA Technologies, Inc.
Pro Forma Consolidated Statement of Operations
for the nine months ended March 31, 2002
(Unaudited)
Acquisition
Stitch USA Adjustments Pro Forma
------ --- ----------- ---------
Revenue $ 1,005,394 $ 1,118,271 - $ 2,123,665
Operating expenses:
Cost of sales 1,137,153 611,805 - 1,748,958
General and administrative 731,398 3,665,611 - 4,397,009
Compensation 1,988,871 3,155,986 - 5,144,857
Research and development 477,879 642,438 - 1,120,317
Depreciation and amortization 578,789 243,812 - 1,067,701
Total operating expenses 4,914,090 8,319,652 (3) 245,100 13,478,842
----------- ----------- ---------- ------------
(3,908,696) (7,201,381) (245,100) (11,355,177)
Other income (expense):
Interest income 6,937 10,464 - 17,401
Interest expense (150,123) (991,578) - (1,141,701)
Other, net 39,347 - - 39,347
----------- ----------- ---------- ------------
Total other income (expense) (103,839) (981,114) - (1,084,953)
----------- ----------- ---------- ------------
Net loss (4,012,535) (8,182,495) (3)(245,100) (12,440,130)
Cumulative preferred dividends - (822,561) - (822,561)
----------- ----------- ---------- ------------
Loss applicable to common shares $(4,012,535) $(9,005,056) $(245,100) $(13,262,691)
=========== =========== ========== ============
Loss per common share (basic and diluted) $(0.30) $(0.25)
====== ======
Weighted average number of common shares
outstanding (basic and diluted) 30,186,045 23,637,341 53,823,386
========== ========== ==========
F-63
Notes to Unaudited Pro Forma Consolidated Financial Statements
(1) To record the acquisition of Stitch at an assumed purchase price
(calculated pursuant to the Merger Agreement dated May 14, 2002). The
purchase price is assumed to be paid by the issuance of 22,762,341 shares
of USA Technologies, Inc. Common Stock ($7,511,573), the issuance of
8,000,000 Common Stock warrants ($160,000), the issuance of 2,475,318
Common Stock options ($569,323), and the issuance of 875,000 shares of
Common Stock ($288,750) to Technology Partners, LLC for payment of
services rendered to the Company in connection with the acquisition. This
adjustment also records the difference between the assumed purchase price
of $8,529,646 and the net assets of Stitch to: intangible assets
($3,268,000) and goodwill ($5,386,999).
(2) To amortize the intangible assets recorded in connection with the Stitch
acquisition over a 10 year estimated useful life as if the acquisition
occurred on July 1, 2000.
(3) To amortize the intangible assets recorded in connection with the Stitch
acquisition over a 10 year estimated useful life as if the acquisition
occurred on July 1, 2001.
F-64
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Officers and Directors.
Section 1746 of the Pennsylvania Business Corporation Law of 1988, as
amended ("BCL"), authorizes a Pennsylvania corporation to indemnify its
officers, directors, employees and agents under certain circumstances against
expenses and liabilities incurred in legal proceedings involving such persons
because of their holding or having held such positions with the corporation and
to purchase and maintain insurance of such indemnification. Our By-laws
substantively provide that we will indemnify our officers, directors, employees
and agents to the fullest extent provided by Section 1746 of the BCL.
Section 1713 of the BCL permits a Pennsylvania corporation, by so providing
in its By-laws, to eliminate the personal liability of a director for monetary
damages for any action taken unless the director has breached or failed to
perform the duties of his office and the breach or failure constitutes
self-dealing, willful misconduct or recklessness. In addition, no such
limitation of liability is available with respect to the responsibility or
liability of a director pursuant to any criminal statute or for the payment of
taxes pursuant to Federal, state or local law. Our By-laws eliminate the
personal liability of the directors to the fullest extent permitted by Section
1713 of the BCL.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
common stock, other than underwriting discounts and commissions.
Securities and Exchange Commission - Registration Fee . $ 3,213.97
Printing and Engraving Expenses . . . . . . . . . . . $11,786.03
Accounting Fees and Expenses . . . . . . . . . . . $25,000.00
Legal Fees and Expenses . . . . . . . . . . . . . . . $25,000.00
----------
Total . . . . . . . . . . . . . . . . . . $65,000.00
==========
Item 26. Recent Sales of Unregistered Securities.
During the three years immediately preceding the date of the filing of this
registration statement, the following securities were issued by USA without
registration under the Securities Act of 1933, as amended ("Act"):
Private Placements.
During September 2000 we received signed subscription agreements for the
sale of 11.5 units at $100,000 each, for an aggregate of $1,150,000. Each unit
consisted of 100,000 shares of common stock and 100,000 common stock purchase
warrants. The offering was sold to 12 accredited investors, and did not involve
any general advertising or solicitation, and was therefore exempt from
registration under Rule 506 of Regulation D promulgated under the Act.
On September 15, 2000, we signed an Investment Agreement with Swartz
Private Equity, LLC, a private equity fund, pursuant to which Swartz agreed to
purchase up to $20,000,000 of common stock. The purchases would be made at our
option over a three year period in amounts and at prices based upon market
conditions. The purchase by Swartz is subject to an effective registration
statement.
During early 2001, we sold 568.15 units or a total of $5,681,500 principal
amount of 12% Convertible Senior Notes and 1,136,300 shares of common stock. Of
this amount, $3,823,000 of the senior notes were purchased through the exchange
of $3,823,000 of the old senior notes. Each unit consisted of a $10,000
principal amount Senior Note and 2,000 shares of common stock. Each 12%
Convertible Senior Note is convertible into Common Stock at $1.25 per share
anytime through its maturity date of December 31, 2003. Holders of the existing
12% Senior Notes due in December 2001 had the right in invest in the offering by
exchanging their existing Notes instead of paying cash. For each $10,000 face
amount existing Senior Note exchanged, the holder would receive one unit. The
offering was sold to accredited investors and did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Rule 506 of Regulation D promulgated under the Act.
On April 20, 2001 the Company sold 450,000 shares of its Common Stock to 9
accredited investors for $1.00 per share for an aggregate of $450,000. The
offering was sold to accredited investors and did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Rule 506 of Regulation D promulgated under the Act.
In April 2001, the Company issued shares of common stock to our executives
as follows: George R. Jensen, Jr.- 125,000 shares; Stephen P. Herbert - -
120,000 shares; H. Brock Kolls, Jr.- 87,000 shares; Leland P. Maxwell - 39,500
shares; and Michael Lawlor - 34,500 shares. The Company issued the shares
pursuant to the exemption from registration set forth in Section 4(2) of the
Act. All of these investors are accredited investors and we obtained appropriate
investment representations and the securities contained appropriate restrictive
legends under the Act.
During July 2001, the Company issued to La Jolla Cove Investors, Inc. a
warrant to purchase up to 500,000 shares of Common Stock. The warrant can be
exercised at any time in whole or in part within one year following the
effectiveness of the registration statement covering the resale of the shares
issuable upon exercise of the warrant. The exercise price of the warrant is the
lower of $1.00 or 80% of the lowest closing bid price of the Common Stock during
the 20 trading days prior to exercise. The Company has agreed to prepare and
file at its cost and expense a registration statement covering the resale of La
Jolla of the shares underlying the warrant. At the time of the issuance of the
warrant, La Jolla paid to the Company a non-refundable fee of $50,000 to be
credited towards the exercise price under the warrant. A broker-dealer received
a commission of $3,500 in connection with this warrant. The offering of the
warrant and the underlying shares was exempt from registration pursuant to
Section 4(2) of the Act. LaJolla is an accredited investor and we obtained
appropriate investment representation and the securities contained appropriate
restrictive legends under the Act.
During August 2001, the Company issued to La Jolla a $225,000 Convertible
Debenture bearing 9 3/4 percent interest with a maturity date of August 2, 2003.
Interest is payable by the Company monthly in arrears. The Debenture is
convertible at any time after the earlier of the effectiveness of the
registration statement referred to below or 90 days following issuance at the
lower of $1.00 per share or 80% of the lowest closing bid price of the Common
Stock during the 20 days preceding exercise. If on the date of conversion the
closing bid price of the shares is $.40 or below, the Company shall have the
right to prepay the portion being converted at 150% of the principal amount
being converted. In such event, La Jolla shall have the right to withdraw its
conversion notice. At the time of conversion of the Debenture, the Company has
agreed to issue to La Jolla warrants to purchase an amount of Common Stock equal
to ten times the number of shares actually issued upon conversion of the
Debenture. The warrants are exercisable at any time for two years following
issuance and at the related conversion price of the Debenture. The Company has
agreed to prepare and file at its expense a registration statement covering the
resale of the shares of Common Stock underlying the Debenture as well as the
related warrants issuable upon conversion of the Debenture. La Jolla paid to the
Company the sum of $100,000 at the time of the issuance of the Debenture and has
agreed to pay $125,000 at the time of the effective date of the registration
statement. The convertible debenture was issued pursuant to the exemption from
registration set forth in Section 4(2) of the Act. LaJolla is an accredited
investor and we obtained appropriate investment representation and the
securities contained appropriate restrictive legends under the Act.
During the period from March 2001 through September 2001, we sold a total
of 739.54 units in the 2001-B Private Placement Offering at a price of $6,000
per unit. Each unit consisted of 10,000 shares of common stock and 20,000 2001-B
common stock purchase warrants. The offering was sold to 193 accredited
investors, and did not involve any general advertising or solicitation, and was
therefore exempt from registration under Rule 506 of Regulation D promulgated
under the Act.
During the period from September 2001 through October 19, 2001, we sold for
our 2001-C offering an aggregate of 4,212,350 shares of common stock at $.50 per
share for a total of $2,106,175. For each share of common stock purchased, each
investor also received a 2001-C warrant. The offering was sold to 102 accredited
investors, and did not involve any general advertising or solicitation, and was
therefore exempt from registration under Rule 506 of Regulation D promulgated
under the Act.
During October 2001, the Company issued 200,000 shares to Ratner & Prestia,
P.C., an accredited investor. The offering did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Section 4(2) of the Act. The proceeds from the sales of the shares will be
applied by Ratner & Prestia towards the unpaid professional fees due to them by
the Company. The investor is an accredited investor and we obtained appropriate
investment representation and the securities contained appropriate restrictive
legends under the Act.
During the period from November 2001 through June 30, 2002, the Company
sold $4,814,593 principal amount of 12% Convertible Senior Notes due December
31, 2004. Each Senior Note is convertible into shares of common stock at $.40
per share anytime through maturity. The notes were sold to accredited investors
and the offer and sale thereof did not involve any general advertising or
solicitation and the offer and sale was therefore exempt from registration under
Rule 506 of the Regulation D promulgated under the Act.
In January 2002, the Company issued shares of common stock to the following
executive officers as a bonus: George R. Jensen, Jr.- 320,000 shares; Stephen P.
Herbert- 300,000 shares; H. Brock Kolls-200,000 shares; Leland Maxwell-130,000
shares; and Michael Lawlor- 130,000 shares. The issuance of the shares was
exempt from registration under Section 4(2) of the Act. All of these investors
are accredited and we obtained appropriate investment representations and the
securities contained appropriate restrictive legends under the Act.
In May 2002, we acquired Stitch Networks Corporation. Pursuant to the
transaction, Stitch become our wholly-owned subsidiary. In exchange for their
Stitch stock, the Stitch stockholders received an aggregate of 22,762,341 of our
shares of common stock and warrants to purchase up to 8,000,000 of our shares of
common stock at $.40 per share at any time through June 30, 2002. We also issued
to the former option holders of Stitch options to purchase up to 2,475,318
shares at $.165 per share at any time for five years following closing. The
offer and sale of the shares, warrants, and options was exempt from registration
under Section 4(2) of the Act.
The Stitch stockholders acquiring our shares and warrants are all
accredited investors and we obtained appropriate investment representations and
the securities contained appropriate restrictive legends under the Act. The
thirty-three former option holders of Stitch receiving our options consisted of
directors, officers or key employees of Stitch, all of whom were sophisticated
investors. In connection with the issuance of the options, we obtained
appropriate investment representations and the securities contained appropriate
restrictive legends under the Act.
In April 2002, the Company agreed to issue 400,000 shares of Common Stock
to Alex Consulting, Inc., a consultant to the Company. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. The investor
is an accredited investor and we obtained appropriate investment representation
and the securities contained appropriate restrictive legends under the Act.
In April 2002, the Company agreed to issue 90,000 shares of Common Stock to
Larry Gershman, a consultant to the Company. The offer and sale of the shares
was exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
In April 2002, the Company agreed to issue to Technology Partners
(Holdings) LLC, our investment banker, a total of 150,000 shares of Common
Stock. The shares are to be issued at the rate of 25,000 per month under the six
month extension of their consultant agreement. The offer and sale of the shares
was exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
During September 2002, the Company sold 2,000,000 shares of restricted
Common Stock at $.12 per share for aggregate proceeds of $240,000 to an
investor. In addition, in October 2002, the Company granted to the investor
warrants to purchase up to 2,000,000 shares at $.10 per share through November
30, 2002 (later extended to March 31, 2003), and if all of these warrants are
exercised, the investor has been granted another identical warrant for 2,000,000
shares exercisable at any time through March 31, 2003. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. The investor
is an accredited investor and we obtained appropriate investment representation
and the securities contained appropriate restrictive legends under the Act.
Commencing during June 2002 and through October 2002, the Company sold to
186 accredited investors $4,284,008 principal amount of 12% Senior Notes due
December 31, 2005 and 8,568,000 shares of Common Stock. For each $10,000
invested, the subscriber received a $10,000 note and 20,000 shares of Common
Stock. The Company has received signed subscription documents for the
2002-A Private Placement of Senior Notes for $4,284,008, of which
$2,585,000 has been deposited and the remainder of $1,699,008 was
for services. The notes were sold to accredited investors and the offer and sale
thereof did not involve any general advertising or solicitation and the offer
and sale was therefore exempt from registration under Rule 506 of the Regulation
D promulgated under the Act.
La Jolla Cove Investors converted Debentures and exercised warrants. The
investor utilized previously remitted funds to the Company which was reflected
as a deposit in the June 30, 2002 consolidated financial statements.
Specifically, from inception through December 31, 2002, La Jolla converted
$135,000 of 9 3/4 percent Convertible Debentures, for which the Company issued
829,099 shares of stock, and exercised 8,290,990 warrants to purchase Common
Stock at an average price of $.16 per share. The Company had previously
executed a Securities Purchase Agreement with La Jolla for the purchase of
$225,000 (increased by $100,000 on June 18, 2002) of Convertible Debentures
bearing 9 3/4 percent interest with a maturity date of August 3, 2003 (extended
to August 2, 2004 on June 18, 2002). Interest is payable by the Company monthly
in arrears. The Debenture is convertible at any time after the earlier of the
effectiveness of the registration statement or 90 days following issuance, at
the lower of $1.00 per share or 80% (later lowered to 72%) of the lowest closing
bid price of the Common Stock during the 30 days preceding exercise. The offer
and sale of the shares was exempt from registration under Section 4(2) of the
Act.
In July 2002 the Company agreed to issue an aggregate of 234,600 shares to
employees as part of those employees` severance payments at the time of and as
part of the employee`s termination of employment. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. All of these
eight former employees were sophisticated and wer afforded access to all public
filings as well as to any other information reasonably obtainable by USA. We
received investment representations from all of these investors and all the
securities contained appropriate restrictive legends under the Act.
In July 2002, the Company agreed to issue to Karl Mynyk, a former employee,
an aggregate of 125,000 shares in settlement of litigation between he and the
Company. The shares were valued at $.20 per share. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. Mr. Mynyk is
a sophisticated investor, was afforded access to all public filings as well as
to any other information reasonably obtainable by USA. We received investment
representations from him and the securities contained appropriate restrictive
legends under the Act.
In October 2002 and January 2003, the Company issued 529,324 and 593,634
shares, respectively, (valued at $.20 per share) to the holders of the senior
notes in lieu of the cash quarterly interest payments due for the quarters ended
September 2002 and December 2002, respectively. In addition, for these two
quarters the Company granted warrants to purchase up to 1,122,958 shares at $.20
per share at any time prior to December 31, 2004. The offer and sale of the
shares and warrants was exempt from registration under Rule 506 promulgated
under the Act. All of these securities were sold to accredited investors and the
offer and sale did not involve any general advertising or solicitation.
In October 2002, the Company issued to Edwin P. Boynton 50,000 shares in
lieu of the 100,000 options granted to him in April 2002. The offer and sale of
the shares was exempt from registration under Section 4(2) of the Act. Mr.
Boyton is an accredited investor and a Director of the Company, we obtained
investment representations from him and the securities contained appropriate
restrictive legends under the Act.
In October 2002, the Company sold to an investor, Kazi Management VI, Inc.
3,571,429 shares of Common Stock at $.07 per share and issued the following
warrants: (1) warrants to purchase up to 7,142,858 shares of Common Stock at
$.07 at any time for a five year period; and (2) warrants to purchase up to
7,142,858 shares at $.07 per share and up to 5,000,000 shares at $.10 per share,
exercisable over a one year period. The offer and sale of the shares was exempt
from registration under Section 4(2) of the Act. The investor is an accredited
investor and we obtained appropriate investment representations from the
investor and the securities contained appropriate restrictive legends under the
Act.
In October 2002, the Company sold to an investor, Alpha Capital
Aktiengesellscharft, 1,500,000 shares at $.10 per share and granted warrants to
purchase up to 750,000 shares at $.15 per share at any time for five years.
Within seven days following the effectiveness of the registration statement
covering these shares, the Company has agreed to sell to the investor an
additional 1,500,000 shares at $.10 per share and grant warrants to purchase up
to 750,000 shares at the then closing price per share at any time for five
years. The securities were sold to an accredited investor and the offer and sale
thereof did not involve any general advertising or solicitation and the offer
and sale was therefore exempt from registration under Rule 506 of the Regulation
D promulgated under the Act.
In October 2002, the Company granted to the holders of the 12% senior notes
warrants to purchase that number of shares equal to 75% of the dollar amount of
the notes held by such holder. The total number of warrants issued was
10,360,025 and are exercisable at any time prior to March 31, 2003. If the
holder exercises all of such holder`s warrants, the holder shall receive another
identical warrant exercisable at any time prior to March 31, 2003. From November
2002 through March 31, 2003, 6,493,691 of these warrants were exercised at $.10
per share for a total of $649,369. The offer and sale of the warrants and these
shares was exempt from registration under Rule 506 promulgated under the Act.
All of the noteholders are accredited investors and already the holders of our
notes. The warrants and the shares all contained appropriate restrictive legends
under the Act.
On October 31, 2002, eight employees of and two consultants to USA entered
into subscription agreements with USA to receive an aggregate of 1,480,000
shares for services to be rendered to USA. The shares were valued at $.125 per
share and were exempt from registration under Section 4(2) of the Act. All of
the employees and consultants were sophisticated investors, made appropriate
investment representations, were afforded access to all public filings and all
other information that USA could reasonably obtain, and the securities contained
appropriate restrictive legends under the Act.
In November 2002 and through April 4, 2003, the Company issued an aggregate
of 13,327,880 shares to 126 accredited investors at $.10 per share for an
aggregate of $1,332,788. The offer and sales of the shares was exempt from
registration under Rule 506 promulgated under the Act. In this regard, the offer
and sale thereof did not involve any general advertising or solicitation and the
securities contained appropriate restrictive legends under the Act.
In February, 2003, Jubilee Investment Trust, PLC ("Jubilee"), a United
Kingdom investment trust made an equity investment in USA Technologies at
U.S.$0.20 per share. Jubilee is a newly established investment trust set up to
invest in securities traded on a range of public markets, primarily in the
United Kingdom. USA Technologies issued to Jubilee 15,000,000 shares of Common
Stock of USA Technologies at a price per share of U.S.$0.20 with an aggregate
value of U.S.$3,000,000. In full payment for the shares of USA Technologies,
Jubilee issued to USA Technologies a U.S.$3,000,000 equivalent of their shares
(1,870,091 shares of Jubilee at a price per share valued at One British Pound
which was the initial public offering price per share for the Jubilee shares).
The exchange rate used by the parties for the transaction was One British Pound
equals U.S.$1.6042. The shares to be issued to Jubilee by USA Technologies will
not be registered under the Securities Act of 1933, as amended. Jubilee has
agreed not to sell USA Technologies` shares for a period of two (2) years from
the date of issuance unless USA Technologies agrees otherwise. The shares were
issued to Jubilee by USA pursuant to the exemption from registration set forth
in Section 4(2) of the Act.
In March 2003, we issued a warrant to La Jolla Cove Investors, Inc. to
purchase up to 9,000,000 shares at $.10 per share. The warrants expire as
follows: 3,000,000 on the three month anniversary of the date of this
prospectus; 3,000,000 on the 6 month anniversary of the date of this prospectus;
and 3,000,000 on the 9 month anniversary of the date of this prospectus. The
warrants may not be exercised without our consent on any date on which the
closing price of our shares is less than $.40. We have agreed to register the
shares underlying the warrants for resale under the Act for a period of one
year. The warrants were offered and sold to La Jolla pursuant to the exemption
from registration set forth in Section 4(2) of the Act.
In April 2003, we issued 551,327 shares and warrants to purchase
up to 551,327 shares to the holders of our senior notes who elected to receive
these securities in lieu of the cash interest payment due for the quarter ended
March 31, 2003. The shares were purchased at the rate of $.20 per share and the
warrants are exercisable at $.20 per share at any time through June 30, 2004. We
have agreed to register the shares and the shares underlying the warrants under
the Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and there was no
general solicitation or advertising.
II. Stock Options
In September 2000, we issued to Swartz Private Equity, LLC, a warrant to
purchase up to 1,200,000 shares at a purchase price of $1.00 per share. The
number of shares subject to the option and the exercise price are subject to
adjustment.
In October 2000, we issued to George R. Jensen, Jr., options to purchase up
to 200,000 shares of our common stock at $1.50 per share. In February 2001, we
extended the expiration date of those options until June 30, 2003.
During March 2001, the Company granted to Automated Merchandising Systems,
Inc. options to purchase up to 1,000,000 shares at $1.00 per share at any time
through June 30, 2001. The expiration date of these options was extended until
September 30, 2001. These options have expired.
During March 2001, the Company granted to each of the six Directors who
were not executive officers options to purchase up to 50,000 shares of Common
Stock for $1.00 at any time within five years of vesting.
During March 2001, the Company granted to employees of the Company who were
not executive officers fully vested options to purchase up to 85,000 shares of
Common Stock for $1.00 at any time within five years of vesting.
During April 2001, the Company issued options to the following executives:
George R. Jensen, Jr. - 100,000 options; Stephen P. Herbert - 80,000 options; H.
Brock Kolls, Jr. - 80,000 options; Leland P. Maxwell - 50,000 options; and
Michael Lawlor - 50,000 options. The options are exercisable at any time within
five years following vesting at $1.00 per share.
During April 2001, the Company issued to Marconi Online Systems, Inc. an
option to purchase up to 6,000,000 shares, of which 3,000,000 are exercisable at
$1.00 per share through June 5, 2001, and 3,000,000 are exercisable at $1.25
through September 5, 2001. None of these options were exercised.
During April 2001, the Company issued to Swartz Private Equity, LLC, a
warrant to purchase up to 377,927 shares of common stock at $1.00 per share. The
exercise price is subject to semi-annual reset provisions.
In August 2001, we issued to Larry Gershman, a marketing and financial
consultant, fully vested warrants to purchase an aggregate of 150,000 shares of
our common stock at $.70 per share exercisable at any time through August 2,
2003. In September 2001, we issued fully vested options to the following
employees or consultants: Adele Hepburn - 200,000 options; Frances Young -
100,000 options; and George O`Connell - 100,000 options. The options are
exercisable at $.70 per share at any time through June 30, 2003.
In November 2001, the Company authorized issuance of 1,080,000 fully vested
options to purchase its Common Stock to its Executive Officers, provided that
they were employed by the Company as of January 2, 2002. The amounts of options
authorized were: George R. Jensen, Jr. - 320,000 options; Stephen P. Herbert -
300,000 options; Haven Brock Kolls 200,000 options; Leland Maxwell - 130,000
options; and Michael Lawlor - 130,000 options. Each option is exercisable at
$.40 per share at any time and on or before June 30, 2003. These options vested
during March, 2002.
In November 2001, the Company issued the following fully vested options to
purchase an aggregate of 650,000 shares: Gary Oakland - 100,000 options; Adele
Hepburn - 300,000 options; and Frances Young - 250,000 options. These options
vested during March, 2002.
In April 2002, the Company granted to H. Brock Kolls an aggregate of fully
vested options to purchase up to 50,000 shares exercisable at $.40 per share for
a three year period following issuance.
On December 31, 2002, a total of 778,000 options to purchase Common Stock
were cancelled by members of the Board of Directors, and reported on Form 4 to
the SEC. No new options have been issued.
On December 31, 2002, a total of 1,290,000 options to purchase Common Stock
were cancelled by executive officers, and reported on Form 4 to the SEC. No new
options have been issued.
The issuance of all of the foregoing options was made in reliance upon the
exemption provided by Section 4(2) of the Act as all of the options were issued
to officers, directors, employees or consultants of USA, each of such issuances
were separate transactions not part of any plan, and none of the issuances
involved any general solicitation or advertising.
Item 27. Exhibits.
Exhibit
Number Description
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3.1 Articles of Incorporation of USA filed on January 16, 1992 (Incorporated by
reference to Exhibit 3.1 to Form SB-2 Registration Statement No. 33-70992).
3.1.1 First Amendment to Articles of Incorporation of USA filed on July 17, 1992
(Incorporated by reference to Exhibit 3.1.1 to Form SB-2 Registration Statement
No. 33-70992).
3.1.2 Second Amendment to Articles of Incorporation of USA filed on July 27,
1992 (Incorporated by reference to Exhibit 3.1.2 to Form SB-2 Registration
Statement No. 33-70992).
3.1.3 Third Amendment to Articles of Incorporation of USA filed on October 5,
1992 (Incorporated by reference to Exhibit 3.1.3 to Form SB-2 Registration
Statement No. 33-70992).
3.1.4 Fourth Amendment to Articles of Incorporation of USA filed on October 18,
1993 (Incorporated by reference to Exhibit 3.1.4 to Form SB-2 Registration
Statement No. 33-70992).
3.1.5 Fifth Amendment to Articles of Incorporation of USA filed on June 7,
1995(Incorporated by Reference to Exhibit 3.1 to Form SB-2 Registration
Statement No. 33-98808).
3.1.6 Sixth Amendment to Articles of Incorporation of USA filed on May 1, 1996
(Incorporated by Reference to Exhibit 3.1.6 to Form SB-2 Registration Statement
No. 333-09465).
3.1.7 Seventh Amendment to Articles of Incorporation of USA filed on March 24,
1997 (Incorporated by reference to Exhibit 3.1.7 to Form SB-2 Registration
Statement No. 333-30853).
3.1.8 Eighth Amendment to Articles of Incorporation of USA filed on July 5, 1998
(Incorporated by reference to Exhibit 3.1.8 to Form 10-KSB for the fiscal year
ended June 30, 1998).
3.1.9 Ninth Amendment to Articles of Incorporation of USA filed on October 1,
1998 (Incorporated by reference to Exhibit 3.1.9 to Form SB-2 Registration
Statement No. 333-81591).
3.1.10 Tenth Amendment to Articles of Incorporation of USA filed on April 12,
1999 (Incorporated by reference to Exhibit 3.1.10 to Form SB-2 Registration
Statement No. 333-81591).
3.1.11 Eleventh Amendment to Articles of Incorporation of USA filed on June 7,
1999 (Incorporated by reference to Exhibit 3.1.11 to Form SB-2 Registration
Statement No. 333-81591).
3.2 By-Laws of USA (Incorporated by reference to Exhibit 3.2 to Form SB-2
Registration Statement No. 33-70992).
4.1 Warrant Agreement dated as of June 21, 1995 between USA and American Stock
Transfer and Trust Company (Incorporated by reference to Exhibit 4.1 to Form
SB-2 Registration Statement N. 33-98808, filed October 31, 1995).
4.2 Form of Warrant Certificate (Incorporated by reference to Exhibit 4.2 to
Form SB-2 Registration Statement, No. 33-98808, filed October 31, 1995).
4.3 1996 Warrant Agreement dated as of May 1, 1996 between USA and American
Stock Transfer and Trust Company (Incorporated by reference to Exhibit 4.3 to
Form SB-2 Registration Statement No. 333-09465).
4.4 Form of 1996 Warrant Certificate (Incorporated by reference to Exhibit 4.4
to Form SB-2 Registration Statement No. 333-09465).
4.5 Form of 1997 Warrant (Incorporated by reference to Exhibit 4.1 to Form SB-2
Registration Statement No. 333-38593, filed February 4, 1998).
4.6 Form of 12% Senior Note (Incorporated by reference to Exhibit 4.6 to Form
SB-2 Registration Statement No. 333-81591).
4.7 Warrant Certificate of I. W. Miller Group, Inc. (Incorporated by reference
to Exhibit 4.7 to Form SB-2 Registration Statement No. 84513).
4.8 Warrant Certificate of Harmonic Research, Inc. (Incorporated by reference to
Exhibit 4.8 to Form SB-2 Registration Statement No. 333-84513).
4.9 Registration Rights Agreement dated August 3, 2001 by and between the
Company and La Jolla Cove Investors, Inc. (Incorporated by reference to Exhibit
4.9 to Form 10-KSB filed on October 1, 2001).
4.10 Securities Purchase Agreement dated August 3, 2001 between the Company and
La Jolla Cove Investors, Inc. (Incorporated by reference to Exhibit 4.10 to Form
10-KSB filed on October 1, 2001).
4.11 Form of Conversion Warrants to be issued by the Company to La Jolla Cove
Investors, Inc. (Incorporated by reference to Exhibit 4.11 to Form 10-KSB filed
on October 1, 2001).
4.12 $225,000 principal amount 9 3/4% Convertible Debenture dated August 3, 2001
issued by the Company to La Jolla Cove Investors, Inc. (Incorporated by
reference to Exhibit 4.12 to Form 10-KSB filed on October 1, 2001).
4.13 Warrant certificate dated July 11, 2001 from the Company to La Jolla Cove
Investors, Inc. (Incorporated by reference to Exhibit 4.13 to Form 10-KSB filed
on October 1, 2001).
4.14 August 2, 2001 letter from La Jolla Cove Investors, Inc. to the Company
(Incorporated by reference to Exhibit 4.14 to Form 10-KSB filed on October 1,
2001).
4.15 Subscription Agreement dated October 26, 2001 by and between the Company
and Ratner & Prestia, P.C. (Incorporated by reference to Exhibit 4.15 to Form
SB-2 Registration Statement No. 333-72302).
4.16 Subscription Agreement dated October 26, 2002 by and between the Company
and Ratner & Prestia, P.C.
4.17 Stock Purchase Agreement dated October 26, 2002 by and between the
Company and Kazi Management VI, Inc.
4.18 Warrant Certificate (no. 189) dated October 26, 2002 in favor of Kazi
Management VI, Inc.
4.19 Registration Rights Agreement dated October 26, 2002 by and between the
Company and Kazi Management, Inc.
4.20 Warrant Certificate (no. 190) dated October 26, 2002 in favor of Kazi
Management VI, Inc.
4.21 Subscription Agreement dated November 4, 2002 by and between the Company
and Alpha Capital Aktiengesellschaft
4.22 Form of Common Stock Purchase Warrant dated November 4, 2002 in favor of
Alpha Capital Aktiengesellschaft
**4.23 Warrant Certificate (No. 196) dated March 17, 2003 in favor of LaJolla Cove Investors, Inc.
**4.24 Form of 2004 Senior Note
**4.25 Form of 2005 Senior Note
5.1 Opinion of Lurio & Associates, P.C.
10.1 Employment and Non-Competition Agreement between USA and Adele Hepburn
dated as of January 1, 1993 (Incorporated by reference to Exhibit 10.7 to Form
SB-2 Registration Statement No. 33-70992).
10.2 Adele Hepburn Common Stock Options dated as of July 1, 1993 (Incorporated
by reference to Exhibit 10.12 to Form SB-2 Registration Statement No. 33-70992).
10.3 Certificate of Appointment of American Stock Transfer & Trust Company as
Transfer Agent and Registrar dated October 8, 1993 (Incorporated by reference to
Exhibit 10.23 to Form SB-2 Registration Statement No. 33-70992).
10.4 Employment and Non-Competition Agreement between USA and H. Brock Kolls
dated as of May 1, 1994 (Incorporated by reference to Exhibit 10.32 to Form SB-2
Registration Statement No. 33-70992).
10.4.1 First Amendment to Employment and Non-Competition Agreement between USA
and H. Brock Kolls dated as of May 1, 1994 (Incorporated by reference to Exhibit
10.13.1 to Form SB-2 Registration Statement No. 333-09465).
10.4.2 Third Amendment to Employment and Non-Competition Agreement between USA
and H. Brock Kolls dated February 22, 2000 (Incorporated by reference to Exhibit
10.3 to Form S-8 Registration Statement No. 333-341006).
10.5 H. Brock Kolls Common Stock Options dated as of May 1, 1994 (Incorporated
by reference to Exhibit 10.42 to Form SB-2 Registration Statement No. 33-70992).
10.5.1 H. Brock Kolls Common Stock Options dated as of March 20, 1996
(Incorporated by reference to Exhibit 10.19 to Form SB-2 Registration Statement
No. 33-70992)
10.6 Barry Slawter Common Stock Options dated as of August 25, 1994
(Incorporated by reference to Exhibit 10.43 to Form SB-2 Registration Statement
No. 33-70992).
10.7 Employment and Non-Competition Agreement between USA and Michael Lawlor
dated June 7, 1996 (Incorporated by reference to Exhibit 10.28 to Form SB-2
Registration Statement No. 333-09465).
10.7.1 First Amendment to Employment and Non-Competition Agreement between USA
and Michael Lawlor dated February 22, 2000 (Incorporated by reference to Exhibit
10.5 to Form S-8 Registration Statement No. 333-34106).
10.8 Michael Lawlor Common Stock Option Certificate dated as of June 7, 1996
(Incorporated by reference to Exhibit 10.29 to Form SB-2 Registration Statement
No.333-09465).
10.9 Employment and Non-Competition Agreement between USA and Stephen P. Herbert
dated April 4, 1996 (Incorporated by reference to Exhibit 10.30 to Form SB-2
Registration Statement No. 333-09465).
10.9.1 First Amendment to Employment and Non-Competition Agreement between USA
and Stephen P. Herbert dated February 22, 2000 (Incorporated by reference to
Exhibit 10.2 to Form S-8 Registration Statement No. 333-34106).
10.9.2 Second Amendment to Employment and Non-Competition Agreement
between Stephen P. Herbert and the Company dated April 15, 2002.
10.10 Stephen P. Herbert Common Stock Option Certificate dated April 4, 1996
(Incorporated by reference to Exhibit 10.31 to Form SB-2 Registration Statement
No. 333-09465).
10.11 RAM Group Common Stock Option Certificate dated as of August 22, 1996
(Incorporated by reference to Exhibit 10.34 to Form SB-2 Registration No.
33-98808).
10.12 RAM Group Common Stock Option Certificate dated as of November 1, 1996
(Incorporated by reference to Exhibit 10.35 to Form SB-2 Registration No.
33-98808).
10.13 Joseph Donahue Common Stock Option Certificate dated as of September 2,
1996 (Incorporated by reference to Exhibit 10.37 to Form SB-2 Registration No.
33-98808).
10.14 Employment and Non-Competition Agreement between USA and Leland P. Maxwell
dated February 24, 1997 (Incorporated by reference to Exhibit 10.39 to Form SB-2
Registration No. 33-98808)
10.14.1 Second Amendment to Employment and Non-Competition Agreement between USA
and Leland P. Maxwell dated February 22, 2000 (Incorporated by reference to
Exhibit 10.4 to Form S-8 Registration Statement No. 333-34106)
10.15 Leland P. Maxwell Common Stock Option Certificate dated February 24, 1997
(Incorporated by reference to Exhibit 10.40 to Form SB-2 Registration No.
33-98808).
10.16 Letter between USA and GEM Advisers, Inc. signed May 15, 1997
(Incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 22, 1997).
10.17 H. Brock Kolls Common Stock Option Certificate dated as of June 9, 1997
(Incorporated by reference to Exhibit 10.43 to Form SB-2 Registration Statement
333-30853).
10.18 Stephen Herbert Common Stock Option Certificate dated as of June 9, 1997
(Incorporated by reference to Exhibit 10.44 to Form SB-2 Registration Statement
No. 333-30853).
10.19 Michael Feeney Common Stock Option Certificate dated as of June 9, 1997
(Incorporated by reference to Exhibit 10.46 to Form SB-2 Registration Statement
No. 333-30853).
10.20 Joint Venture Agreement dated September 24, 1997 between USA and Mail
Boxes Etc. (Incorporated by reference to Exhibit 10.47 to Form 10-KSB filed on
September 26, 1997).
10.21 Employment and Non-competition Agreement between USA and George R. Jensen,
Jr. dated November 20, 1997 (Incorporated by reference to Exhibit 10.1 to Form
8-K filed on November 26, 1997).
10.21.1 First Amendment to Employment and Non-Competition Agreement between USA
and George R. Jensen, Jr., dated as of June 17, 1999.
10.21.2 Second Amendment to Employment and Non-Competition Agreement between USA
and George R. Jensen, Jr. dated February 22, 2000 (Incorporated by reference to
Exhibit 10.1 to Form S-8 Registration Statement No. 333-34106).
10.21.3 Third Amendment to Employment and Non-Competition Agreement
between USA and George R. Jensen, Jr. dated January 16, 2002.
10.21.4 Fourth Amendment to Employment and Non-Competiton Agreement
between USA and George R. Jensen, Jr., dated April 15, 2002.
10.22 Agreement between USA and Promus Hotels, Inc. dated May 8, 1997
(incorporated by reference to Exhibit 10.49 to Form SB-2 Registration Statement
No. 333-38593, filed on February 4, 1998).
10.23 Agreement between USA and Choice Hotels International, Inc. dated April
24, 1997 (Incorporated by reference to Exhibit 10.50 to Form SB-2 Registration
Statement No. 333-38593, filed on February 4, 1998).
10.24 Agreement between USA and PNC Merchant Services dated July 18, 1997
(Incorporated by reference to Exhibit 10.51 to Form SB-2 Registration Statement
No. 333-38593, filed on February 4, 1998).
10.25 Separation Agreement between USA and Keith L. Sterling dated April 8, 1998
(Incorporated by reference to Exhibit to Exhibit 10.1 to Form 10-QSB filed May
12, 1998).
10.26 Phillip A. Harvey Common Stock Option Certificate dated as of April 22,
1999 (Incorporated by reference to Exhibit 10.35 to Form SB-2 Registration
Statement No. 333-81591).
10.27 Consulting Agreement between Ronald Trahan and USA dated November 16, 1998
(incorporated by Reference to Exhibit 28 to Registration Statement No. 333-67503
on Form S-8 filed on November 18, 1998)
10.28 Consulting Agreement between Mason Sexton and USA dated March 10, 1999
(incorporated by reference to Exhibit 28 to Registration Statement No. 333-74807
on Form S-8 filed on March 22, 1999).
10.29 Financial Public Relations Agreement between USA and I. W. Miller Group,
Inc. dated August 1, 1999 (Incorporated by reference to Exhibit 10.38 to Form
SB-2 Registration Statement No. 333-84513).
10.30 Consulting Agreement between Harmonic Research, Inc. and USA dated August
3, 1999 (Incorporated by reference to Exhibit 10.39 to Form SB-2 Registration
Statement No. 333-84513).
10.31 Investment Agreement between USA and Swartz Private Equity, LLC dated
September 15, 2000 (incorporated by reference to Exhibit 10.1 to Form 8-K dated
September 21, 2000).
10.32 Commitment Warrant issued to Swartz Private Equity LLC dated August 23,
2000 (incorporated by reference to Exhibit 10.2 to Form 8-K dated September 21,
2000).
10.33 Warrant Anti-Dilution Agreement between USA and Swartz Private Equity, LLC
dated September 15, 2000 (incorporated by reference to Exhibit 10.3 to Form 8-K
dated September 21, 2000).
10.34 Registration Rights Agreement between USA and Swartz Private Equity dated
September 15, 2000 (incorporated by reference to Exhibit 10.4 to Form 8-K dated
September 21, 2000).
10.35 Agreement for Wholesale Financing and Addendum for Scheduled Payment Plan
with IBM Credit Corporation dated May 6, 1999 (incorporated by reference to
Exhibit 10.40 to Form 10-KSB for the fiscal year ended June 30, 1999).
10.36 Agreement and Plan of Merger dated April 10, 2002, by and among the
Company, USA Acquisitions, Inc., Stitch Networks Corporation, David H.
Goodman, Pennsylvania Early Stage Partners, L.P., and Maytag Holdings, Inc.
(Incorporated by reference to Exhibit 2.1 to Form 10-QSB for the quarter
ended March 31, 2002).
**10.37 Cancellation of subscription Agreement between USA and Ratner & Prestia, P.C. dated March 20, 2003.
**10.38 Agreement between USA and Mars Electronics, Inc. dated March 8, 2002.
**10.39 Strategic Alliance Agreement between USA and ZiLOG Corporation dated October 15, 2002.
**10.40 Vending Placement, Supply and Distribution Agreement between Stitch Networks Corporation, Eastman Kodak Company,
Maytag Corporation and Dixie-Narco, Inc. dated December 2000.
**10.41 Design and Manufacturing Agreement between USA and RadiSys dated June 27, 2000.
**10.42 Loan Agreement between Stitch Networks Corporation and US Bancorp dated May 22, 2001.
**23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney
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** -- Filed herewith.
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement. Provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act of 1933,
each filing of the registrant`s annual report pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Amendment No. 1 to Form SB-2 and has duly
caused this Amendment No. 1 to Registration Statement on Form SB-2 to be signed
on its behalf by the undersigned, thereunto duly authorized, in Wayne,
Pennsylvania, on April 17, 2003.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
------------------------------------
George R. Jensen, Jr.,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
This Amendment No. 1 to Registration Statement has been duly signed below by the
following persons in the capacities and dates indicated.
Signatures Title Date
---------- ----- ----
/s/ George R. Jensen, Jr. Chairman of the Board, April 17, 2003
--------------------------- and Chief Executive
George R. Jensen, Jr. Officer (Principal and
Chief Executive Officer) Director
/s/ Leland P. Maxwell Vice President, Chief April 17, 2003
--------------------------- Financial Officer
Leland P. Maxwell Treasurer (Principal Accounting
Officer)
/s/ Stephen P. Herbert President, Chief April 17, 2003
--------------------------- Operating Officer,
Stephen P. Herbert Director
* Director April 17, 2003
----------------------------
William W. Sellers
* Director April 17, 2003
---------------------------
William L. Van Alen, Jr.
Director April __, 2003
---------------------------
Steven Katz
* Director April 17, 2003
---------------------------
Douglas M. Lurio
Director April __, 2003
---------------------------
Edwin R. Boynton
Director April __, 2003
---------------------------
Kenneth C. Boyle
* By: /s/ George R. Jensen, Jr.
-------------------------
George R. Jensen, Jr., as
Attorney-in-Fact pursuant to
the Power of Attorney previously
provided as part of the
Registration Statement.
EXHIBIT INDEX
Exhibit Number Description
-------- -----------
4.23 Warrant Certificate (No. 196) dated March 17, 2003 in favor of LaJolla Cove Investors, Inc.
4.24 Form of 2004 Senior Note
4.25 Form of 2005 Senior Note
10.37 Cancellation of subscription Agreement between USA and Ratner & Prestia, P.C. dated March 20, 2003.
10.38 Agreement between USA and Mars Electronics, Inc. dated March 8, 2002.
10.39 Strategic Alliance Agreement between USA and ZiLOG Corporation dated October 15, 2002.
10.40 Vending Placement, Supply and Distribution Agreement between Stitch Networks Corporation, Eastman Kodak Company,
Maytag Corporation and Dixie-Narco, Inc. dated December 2000
10.41 Design and Manufacturing Agreement between USA and RadiSys dated June 27, 2000.
10.42 Loan Agreement between Stitch Networks Corporation and US Bancorp dated May 22, 2001.
23.1 Consent of Independent Auditors
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